Demonstrating the source of your down payment
The time leading up to the closing day on your new home purchase can be very stressful and there are a number of things that must come together before you are handed the keys to your new home. One of these requirements involves your down payment and the verification of the source of your down payment. This is to ensure that borrowed money is not being used for the down payment. This information is required by your lender, as well as, in some cases, insurance providers such as the Canada Housing and Mortgage Corporation (CMHC).
Down payment sources fall into one of the following three categories:
1. Down payment from the sale of your current home
When selling your current home and buying a new property, proceeds from the sale are typically put towards the new purchase as the down payment. In order to verify this form of down payment, you must supply a copy of the purchase agreement for your current home along with a statement showing the balance of any mortgages currently tied to that property. The difference between the net proceeds of the current home sale, and the outstanding mortgage still remaining on the property, represents the amount that you are able to apply to the new home purchase in the form of a down payment.
2. Self-funded down payment
Not all buyers have the profit from the sale of an existing property to use towards a down payment. First-time buyers, for instance, often use their savings to provide the down payment. To demonstrate that your savings do not include recently borrowed funds, you must be able to verify that you have held the funds in your name for a minimum of 90 days. If you’ve recently sold investments to put towards your down payment, you will have to provide evidence of those transactions as well.
3. Down payment in the form of a gift
Gifted funds can make up all or part of your down payment. However, the following conditions must be met in order for small or large gifted funds to be acceptable:
- The gift provider must be an immediate family member of the home buyer.
- The gift provider must declare that the money is indeed a gift and that there is no requirement for the home buyer to repay the gift.
- Proof that the gifted amount was transferred into the home buyer’s account.
Home Trust requires the completion of the Gifted Down Payment form with any mortgage application when any part of the down payment comes from a gift to the borrower. Note with large gifted funds for down payment, Home Trust performs incremental due diligence over and above smaller gifted funds. Additional information and documentation may be required.
Because all these details must be verified, and because the funds must be in the borrower’s possession before mortgage insurance can be arranged and the mortgage funds released, you should have everything in place well before the expected closing date.
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