Verifying Your Down Payment When Purchasing

 

Saving for a down payment is one of the biggest challenges facing people wanting to buy their first home. Verifying the down payment when purchasing a home via supporting documentation is required by alllenders. Doing so also protects against fraud and confirms that you are not borrowing your down payment, which could changes debt servicing ratios and your overall mortgage approval.

DOCUMENTATION REQUIRED BY THE LENDER TO VERIFY YOUR DOWN PAYMENT

There are STRICT Federal Government (AML) Anti-Money Laundering requirements and this also protects the lender against fraud.

1. Personal Savings/Investments: Your lender needs to see a minimum of 3 months’ history of where the money for your down payment is coming from including your: savings, Tax Free Savings Account (TFSA) or investment money.

Regularly deposit all your cash in the bank, don’t squirrel your money away at home. Lenders cannot verify the $10,000 cash that has been sitting under your mattress. Your bank statements will must be clear to show your name and your account number.
Any large deposits outside of “normal” will need to be explained (i.e. tax return, bonus from work, sale of a large ticket item). If you have transferred money from once account to another you will need to show a record of the money leaving one account and arriving in the other. Lenders want to see a paper trail of where your down payment is coming from and how it got into your account.

2. Gifted Down Payment: In some expensive real estate markets like Metro Vancouver & Toronto, the bank of Mom & Dad help 20% of first time home buyers. You can use these gifted funds for your down payment if you have a signed gift letter from your family member that states the down payment is a true gift and no repayment is required. The Gift Letter is a key piece in verifying your down payment when purchasing your home.

Gifted down payments are only acceptable from immediate family members: parents, grandparents & siblings.
We will need to show the gifted funds have been deposited in your account 15 days prior to closing. The lender may want to see a transaction record. i.e. $30,000 from Bank of Mom & Dad’s account transferred to yours and a record of the $30,000 landing in your account. We will provide the applicable Gift Letter template for your use at application time.

3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.

Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home. The funds are not required to be used only for the down payment. These funds can be used for other purposes to assist in the purchase of a home.
If you buy a qualifying home together with your spouse or other individuals, each of you can withdraw up to $35,000.
You must repay all withdrawals to your RRSP’s 15 years. Generally, you will have to repay an amount to your RRSP each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year (i.e. $35,000/15 years = $2,333.33 per year), it will be added to your income for that year.
Verifying your down payment from your RRSP, you will need to prove the funds show a 3-month RRSP history via your account statements which need to include your name and account number. Funds must be sitting in your account for 90 days to use them for HBP.

4. Proceeds from Selling Your Existing Home: If your down payment is coming from the proceeds of selling your currently home, then you will need to show your lender an accepted offer of Purchase and Sale (with all subjects removed) between you and the buyer of your current home.

If you have an existing mortgage on your current home, you will need to provide an up-to-date mortgage statement. This will also count towards verifying your down payment when purchasing the next home.

5. Money from Outside Canada: Using funds from outside of Canada is acceptable, but you need to have the money on deposit in a Canadian financial institution at least 30 days before your closing date. Most lenders will also want to see that you have enough funds to cover Property Transfer Tax (in BC) PLUS 1.5% of the purchase price available in your account to cover your closing costs (i.e. legal fees & taxes, etc.).

Property Transfer Tax (PTT) All buyers pay Property Transfer Tax (except first-time buyers purchasing under $500,000 and New Builds under $750,000). This is a cash expense, in addition to your down payment. The Property Transfer Tax (PTT) cannot be financed into the mortgage. Being prepared with the right documentation for your down payment and closing costs can make the process much easier. Courtesy of K.Hudson @DLC

Mortgage Insights – 2019 Mortgage Trends report

Here are some Mortgage Insights from CMHC’s latest national edition of the Mortgage and Consumer Credit Trends report covers the second quarter of 2019. Here are a few facts to consider. Contact us at https://primemortgageworks.com/contact/ for more information.

  • indebtedness is higher than one year ago, increasing the vulnerability of Canadians to financial difficulties
  • the average outstanding balance of newly originated mortgages declined, reversing a trend of growth
  • the new mortgages share of all loans moved higher into 2019. This mirrors the national trend in home sales, which fell in 2018, and has risen in 2019
  • only HELOCs and mortgages showed considerable growth in monthly obligations on average

Mortgage holders tend to have a higher credit score the non-mortgage holders – Mortgage Insights

Across the board since the beginning of 2019 to the second quarter, credit scores for consumers with and without a mortgage are rising. The credit scores were reported highest for consumers with a mortgage. Over the last 4 years, the average credit scores for consumers without a mortgage have worsened slightly, indicating that these consumers are having a harder time paying off debt than those with a mortgage.

Loan balances rise in Montreal and Toronto due to house price growth in those CMAs

In the second quarter of 2019, the average outstanding loan balance for new mortgages rose in Montreal and Toronto as a reflection of average price growth. It declined in Vancouver compared to last year. Non-mortgage debt has also been rising by region over the last four years, with slightly larger monthly obligations for Montreal.

Despite the large size of millennials entering the market, the share of mortgages held by people aged 55+ grew, as fewer young adult consumers were mortgage holders.

How Payment Frequency Can Save Money

One of the decisions you will need to make before your new mortgage is set up, is what kind of payment frequency you would like to have. For many, sticking to a monthly payment is the default, however, other payment frequency choices can save you money in interest costs over time.

Monthly Payments

Monthly payments are exactly as they sound, one payment every month until the maturity date of you mortgage at the end of your term. Took a 3-year term? You will make 36 payments (12 payments a year) and then you will need to renegotiate your interest rate. 5-year term? You will make 60 payments.

$500,000 mortgage

3% interest rate

5-year term

$2,366.23 monthly payment

 

$427,372.90 remaining over 20 years

$69,346.70 paid to interest

$72,627.01 paid to principal

 

Semi Monthly

Semi-monthly is not bi-weekly. Semi monthly is your monthly payment divided by two. That means, you are making 24 payments every year, but each payment is slightly less than half of what the monthly payment would of been.

$500,000 mortgage

3% interest rate

5-year term

$1,182.38 semi monthly payment

 

$427,372.99 remaining over 20 years

$69,258.59 paid to interest

$72,627.01 paid to principal

 

Bi-Weekly

Bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly (2 months a year you make 3 bi-weekly payments). The interest paid and balance owing are slightly less than the others, but mere cents. You will still need to make payments for another 20 years.

$500,000 mortgage

3% interest rate

5-year term

$1,091.38 bi-weekly payment

 

$427,372.36 remaining over 20 years

$69,251.76 paid to interest

$72,627.64 paid to principal

 

Accelerated Bi-Weekly

Just like regular bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly. However because this is accelerated, the payment amount is higher.

$500,000 mortgage

3% interest rate

5-year term

$1,183.11 accelerated bi-weekly payment

 

$414,521.40 remaining over 17 years 4 months

$68,325.70 paid to interest

Payment frequency date makes a difference with your mortgage savings.

Mortgage Payment Frequency Options

$85,478.60 paid to principal

 

You have increased your yearly payment amount by $2,384.98, $11,924.90 over 5-years. That extra $11,924.90 has decreased your outstanding balance at the end of your mortgage term by $12,850.96 because more of your payments went to principal and less went to interest. Also, you will now have your mortgage paid off more than 2.5 years earlier.

The same option is available for accelerated weekly payments which will shave another month off of time required to pay back the whole loan as well. If you can afford to go accelerated, your best option is to do so! Especially in the early years where a larger portion of your payments are going towards interest, not paying down your principal.

If you have any more questions on how choosing the right Payment Frequency can save money, please do not hesitate to reach out to us at Prime Mortgage Works. Information Courtesy of Ryan O. DLC

First Time Homebuyers Mortgage DON’T Tips

First time home buyers tips help you to be prepared before closing but as importantly, AFTER you are pre-approved for a mortgage. In fact, buyers ruin their chances of closing by making simple mistakes once they hear the word “approval” from the mortgage broker. These are some of the most common mistakes people make and most importantly explain what NOT to do as the best First Time Homebuyers Mortgage Tips.

Do Not Start a New Job (please!)

While it is not the most important item for getting a pre-approval, job history and length of time at your present employer is vital to getting approved as a First Time Homebuyer.

If you have been at your current job for more than 2 years, wait until the mortgage is closed before choosing to switch to another company.

Do NOT Purchase a New(er) Car (I beg you!!)

It is so easy to understand the temptation to buy a vehicle after getting a mortgage pre-approval. Most people are a bit nervous and are filled with excitement when they learn they are pre-approved.  If their credit and income are good enough to buy a house, then surely it is good enough to get a great deal on a car, right?

The pre-approval issued by the lender was determined by the current level of debt and income at the moment the person applied for the home loan.

It is best to wait until the loan has closed before trading up on your vehicle.

Do NOT Make a Late Payment on ANY Existing Debt

As previously stated, the pre-approval is determined by a snapshot of your credit at a particular point in time. The track record that you have is documented by the credit report used for your approval. The majority of lenders will request a new credit report for you approximately one or two days before the loan closing. Any late payment that shows up could be a red flag to the lender and cause them to turn down the loan.

So, to be safe, make all payments on time while waiting for the lender to finalize your loan.

Avoid Any Unusually Large Deposits

The best First Time Homebuyers Mortgage Tip is that your credit report shows a track record of your payments over time, your bank account also has a track record. The mortgage underwriter will review your checking and savings account to see if there are any larger-than-normal deposits in the months leading up to the purchase. Avoid any large deposits that do not coincide with your normal banking habits.

Do NOT Open a New Bank Account

We previously mentioned that you should not switch jobs or add any new debt. The theme is consistency and this point fits within that theme.

Whether you have used your current bank for 6 months or 6 years, it is best to stick with that bank until the loan closes. Opening up a new account creates questions among mortgage lenders. They wonder if you are trying to hide funds in one account or if you have unrecorded debt obligations that are going to be facilitated with the new account.

Do NOT Spend your for Down Payment or Closing Costs (no Vegas trips…)

Buying a home can be exciting but also stressful. Getting the utilities switched to a new address, changing the address and hiring the movers can all take time and some funds. While you may have saved up a nice nest egg to prepare for the home purchase, don’t spend all of that money.

The estimate provided to you for the closing is just an estimate. Things like property taxes, homeowner’s insurance, and other costs can creep up and cost a bit more than anticipated. 

Do NOT Close Out Any Debt Account (First Time Homebuyer 101 tip)

It is usually a good idea to pay down debt and close the account, whether it is a credit card, furniture account or local store account. Keeping your debt as is until the mortgage closes, is key here.

Closing out a credit card, for example, may lower your credit score. Remember the pre-approval is a snapshot in time. Keep the picture the SAME as at application time.

The bottom line, leave all accounts open for the time being.

Do NOT Agree to Co-Sign on a New Loan

As mentioned in the First Time Homebuyers Mortgage Tips, borrowers should avoid any new debt, especially in the form of buying a new car. This is also true for other new debt such as new credit cards, new furniture accounts or an unsecured loan. This is especially true for being a co-signor on a loan.

If your mortgage broker told you that you were approved for a mortgage, do not co-sign for a friend or relative. Becoming a co-signer makes you 100% responsible for the new debt, regardless of the good intentions of your friend or relative. This one area is a big no-no for potential homebuyers.

Do NOT Ignore Requests from Your Broker ;)

Think of a lender as a person very similar to you, they are merely trying to do their job. In this case, their job is to help you the First Time Homebuyer.

Sometimes a mortgage underwriter will ask for very specific things. It is not uncommon for an underwriter to request documentation supporting a sale of a car, major change in job or explanation for one missed payment from 14-36 months ago!

If your broker contacts you and asks for some type of document or explanation, be prompt and thorough in providing the answer. Your entire loan could hinge upon this one item and you don’t want to get rejected because you could not find the time to respond to the lender’s inquiry.

Summing Up What Not To Do Before Closing on a House a First Time Homebuyers Mortgage
After you have received your mortgage pre-approval, continue on with your life as if nothing has changed. Keep making payments on time, don’t close out any accounts and don’t add any new debt. Along with the other suggestions above, this should keep you prepared and ready for closing day and a master at First Time Homebuyers Mortgage Tips.

Value Add Home Improvements

If you have the funds to perform improvements on your home, you want to also consider the long-term payback in terms of increase in value and payback when you sell. So, what improvements get you the best return?

 

Adding Square Footage – although a quite significant project both in time and money, this can return between 50-83% of the initial investment.

 

A Deck – adding this brings more use and appeal to the outdoor space, and can return between 65-90% of initial investment.

 

Kitchen Re-Model – there is a sweet spot here, extremely niche styles with million dollar price tags don’t return. However, quality timeless appliances and finishes can get you a return between 50-120% of initial investment.

 

A New Bathroom – adding a bathroom, especially to a one bathroom home (typically older homes have a shortage of bathrooms) can return 80-130% of initial investment.

 

The most important thing to consider is who your future potential buyers may be. Make improvement that will be generally seen as increasing the appeal and livability of the home.

Getting Over the Down Payment Hump

One of the largest barriers to entry into home ownership is saving enough cash for a down payment. Small every day expenses add up; and depending on the market you live in, rent may also be eating a significant portion of your income each month. You do have options; here are some ways you may be able to obtain the funds to put towards a home:

 

Save – Simple. Utilizing a Tax Free Savings Account, determine an amount to save each month that you believe is reasonable yet substantial enough to get you to your down payment goal. Set up automatic transfer into that accounts that line up with payday and bills.

Extra Income – Ever consider a side hustle or second job. Put 100% of this cash flow into your down payment.

Home Buyers Plan – Have money in your RRSP account? The Federal government will allow you to pull up to $35,000 from your RRSP account. Note, you have 15 years to return the funds back into your RRSP account.

Sell and Asset – If you have a valuable asset your willing to give up, sell it! Just make sure to establish a clear paper trail; get a receipt or signed bill of sale to legitimize the source of funds.

The Bank of Mom and Dad – This may or may not be possible. Parent may have built up some equity in their home they can access with a secured line of credit. If this is a gift, a signed gift letter stating so will be needed. If it is to be replayed, the payment must be included in your debt ratios used to qualify.

How Mortgage Brokers Get Paid

Firstly, here at Prime Mortgage Works, we do not charge any retainer or upfront fee for our services. Actually, you don’t pay any fee directly to us for our services, ever! Yes, 100% free, no pressures advise! We are licensed professionals and are governed by provincial bodies, who have you, the clients, best interest in mind.

 

The lender pays us, once your purchase or refinance has completed and you have received your mortgage funds. How do we choose which lender? We take into account many features of a mortgage and your specific needs and wants to advise on the BEST option for you.

 

But, rest assured that it is our mission to guide you through the entire financing process. We are always happy to answer any questions, anytime, whether you have just completed financing, or are three years into your term and considering accessing some of the equity in your home.

Utilizing the Equity in Your Home

Having been in your home for some time, steadily paying off you mortgage, you have subsequently been gaining equity. To access it, begins with refinancing. This is likely more accessible and at a lower cost than obtaining a loan not secured by your valuable asset – your home. For the most part, home equity loans and lines of credit hold lower interest rates and you can access up to 80% the appraised value of your home.

 

You can then utilize these funds to make investment with higher returns. You may plan to use the funds to make improvements on your home, increasing the resale price potential. Or you may plan to consolidate excising debt charging you a high interest rate, decreasing your debt load faster and increasing your monthly cash flow. Or you may want to pursue a business opportunity that will increase your future earning potential. The opportunities are plenty!

Insured, Insurable, Uninsurable?

Mortgage rate pricing is based much on insurance:

 

Insured mortgages are covered by mortgage default insurance through one of three insurers – CMHC, Genworth or Canada Guaranty. A premium is added to the mortgage amount. The amount is a percentage of the loan based on the loan to value ratio with a down payment of less than 20%. These mortgages are most favored by the banks and are reflected by the best rate offers.

 

Insurable mortgages do not necessarily require you to pay an insurance premium when you are providing a down payment larger than 20%. However, if the insurers rules allow, the lender has the option to obtain insurance them selves.

 

Uninsurable mortgages do not meet the insurers rules; such as refinances and mortgages with amortization longer than 25 years. So, no premium can be paid by either the borrower of the lender to obtain default insurance. The risk associated with these mortgages is passed onto the borrower via higher interest rates.

Refinance Plus Improvement Mortgage

A refinance plus improvements can help you finally complete those home renovations you have always wanted to do! A conventional refinance enables a homeowner to borrow up to 80% of the fair market value of their home.

So, the equity a homeowner can access would be the difference between 80% of market value and the amount they currently owe outstanding on their current mortgage. This equity can be used for improvement on the home. But what if you go out and get estimates for the total cost of the project from a contractor and this isn’t quite enough money for the renovation project?

Well, these improvements also have the added bonus of potentially increasing the value of the home! A Refinance Plus Improvements Mortgage considers the post renovation (higher) value of the home, and allows a homeowner to borrow up to 80% of this increased home value.

Get your hard hats ready, and start renovating today!