There are many aspects to a mortgage application, each with its own nuances, details, and require planning. Don’t find yourself saying ‘I wish I’d known that’, when you have a home purchase on the line. Let’s expand on what lenders are looking for with respect to down payment.
In general, lenders like to see 90 days bank statements showing you have the funds. A progressive accumulation of funds is acceptable, for example, paycheques. Any large deposits or transfers will need an explanation. Essentially, the lender wants to ‘follow the money’, so if it came from your other bank accounts, you need to show that statement also, going back 90 days.
The simplest approach is to have your full down payment amount set aside before 90 days back, in a bank account with limited transactions. If funds are not seeded for 90 days, it may fall into the other scenarios below, or, without proper explanation, it may become a deal breaker.
If your down payment is a gift, you need a signed gift letter, including a declaration that the gift is non-repayable. The lender may also ask for proof of the funds. This may involve bank statements from your giftor, which may become a delicate topic, so best to prep for this conversation. Or, the lender may ask for proof of funds landing into your account. Don’t set yourself up for a flagged file, avoid the gray area, a gift should really mean a gift. In general, the gift only qualifies from immediate relative. For the majority of rental property applications, lenders do not accept gift down payment.
If funds are from overseas, prepare for more questions. This is due to money laundering regulations. Firstly, lenders have a list of sanctioned countries which can halt a file. Even if not, lenders often like to see the funds seeded in a Canadian account for a certain amount of time, like up to the 90 days stated above. Transferring funds internationally can take long, don’t put yourself in a time sensitive situation.
Lenders want the funds to be liquid. They will expect, before closing, proof of liquid funds landing into your bank account. This may involve, for example, selling stocks, or a firm sale agreement of another property, if using those sale proceeds. If you qualify, bridge financing may be possible if the sale proceeds come after your subject purchase closing.
Down payment funds can be borrowed, but you have to qualify. Most importantly, the debt payment has to be factored into the debt ratios. In this situation, most preferred is a secured loan, like home equity line of credit (HELOC), secured on another property. Most lenders will accept this as a down payment on a rental purchase. However, an unsecured loan, like personal line of credit, is usually only reserved for owner occupied purchase, and as long as you qualify. For all these loans, you need to have room in your borrowing limit, until the day of closing. Typically, a recent statement is acceptable.
Borrowed funds may weaken the file if it is borderline in other aspects, such as credit, debt ratios or minimum 5% down payment (applies to insured owner occupied purchase). The lender wants to see that you have the capacity to save funds, and won’t spiral into default at the first sign of an unexpected expense. Similarly, for a borderline file, even if you don’t borrow funds, having no additional savings above the down payment may be taken into consideration. This does not mean applicants with limited savings cannot get approved, applicants can demonstrate strength in other areas.
In addition to down payment, lenders request proof of funds for closing costs. The rule of thumb is 1.5% of purchase price, regardless of actual closing costs. This does not mean you don’t plan for actual costs, which can be higher. These funds do not need to be seeded the 90 days, and can be borrowed, even on credit card, for example. If borrowed, however, the loan needs to be factored into the debt ratios.
Unless a qualified gift, it is implied the funds are from your own sources. For example, 90 days savings via your own bank statements or your most recent line of credit statement. A common real estate investor question is about funds from ‘joint venture partners’. The simple answer is, if the funds come from the partner, then the partner has to go on the mortgage application and title. This is why many real estate investors keep aside their own funds to close (like a line of credit with borrowing capacity). This allows flexibility of not adding partner to mortgage application. Note that whoever is on the purchase agreement must be on the mortgage. Working with partners is a more detailed conversation you should be having with a mortgage broker, and ahead of a live purchase offer.
A second mortgage on the subject property, at the time of purchase, can be considered ‘borrowed funds’ for down payment. However, usually second mortgages are done once you own the property, post close, or during a refinance. This route is more costly, and harder to qualify for, if doing it together with a first mortgage at time of purchase. But, it may be the solution for getting you into the property. This scenario is typically shorter term and is coupled with a plan to pay off the second mortgage or restructure the entire combined mortgage.
In general, subject to qualification, minimum down payment for purchase of owner occupied property (or owner occupied with rental suite) is 5%, and, 20% for full rental. Theoretically, if you can qualify with ‘borrowed funds’, such as a secured line of credit, down payment can be zero %.