What is Your Down Payment and Why Does It Matter?
Are you planning to buy a home? Then you’ll want to understand what the down payment is. We’ll go over what a down payment is and why it matters.
What is Your Down Payment?
Your down payment is similar to your deposit. It’s the money you put down on the property to show that you’re serious about buying it.
Your deposit is the money you put down upfront when making an offer on a property. Meanwhile, the down payment is the money you put down right before closing. Sometimes your deposit and down payment is for the same amount, but usually, your down payment is for a lot more than your deposit.
Your down payment can be from your own personal resources. This is money that you saved yourself. It shouldn’t be money that you borrowed.
Another source of funds for your down payment can be a gift. However, the gift can’t just be from anyone. It has to be from an immediate family member. It could be from a parent, grandparent, sister or brother.
Don’t mistake paying the down payment directly to the home seller. You’ll want to spend your down payment to your real estate lawyer via bank draft or certified cheque—your lawyer then facilitates the transfer of the funds to the home seller’s lawyer.
Why Does Your Down Payment Matter?
Your down payment matters because you wouldn’t get a mortgage without it. You’re required to make a down payment of at least 5% when buying a property for $500,000 or less in Canada.
A down payment is needed, so there’s a financial incentive for you to keep paying your mortgage payments and not just walk away from your home if the going gets tough. Without a down payment, homeownership would be just like renting.
What Do Lenders Require?
Due to anti-money laundering legislation, mortgage lenders are required to verify the source of funds of your down payment.
Lenders will usually ask for a 90-day transaction history of your down payment funds. Although sometimes, a lender will only ask for a 30-day account.
It should be pretty simple if your down payment has been sitting in the same account for the last 90 days. However, if you’ve moved your down payment funds around to other bank accounts, that’s when the lender will want to see the transaction history for those other accounts.
To make your life a lot easier, it helps to keep your down payment money in the same bank account. That way, the approval of your down payment documents will be a lot easier.
The Bottom Line
Are you unsure what down payment documents to provide? Maybe you’re using the equity from a home you just sold. Our mortgage experts can help you. Give us a call and we’ll walk you through the process.