Acceptable Down Payment Sources

General Pam Pikkert 25 Jul

Acceptable Down Payment Sources

 

The level of documentation which is required for the average mortgage these days can be very frustrating.  It can seem endless and very nitpicky and annoying because we are able to purchase a vehicle with just a paystub.  There are a few reasons for the increased documentation requirements. 

The first is that the banks are mandated by the Anti-terrorism Act to make sure all funds are legally sourced.  Criminal organizations do exist even here in Central Alberta and they are clever and will launder their funds however they can.  I had the opportunity to attend an anti-fraud session led by the Edmonton police and he told a story of how a routine bylaw infraction led to the discovery of a criminal enterprise which involved more than 32 million dollars in mortgage fraud.  Police resources, insurance proceeds, court time and on and on mean there was a genuine cost to the greater community. Increased due diligence prior to funding can help catch such things ahead of time.

The second is that your banks and mortgage lenders are accountable to the mortgage default insurers and their company’s investors and shareholders and to OSFI which oversees them all.  If you default on your mortgage they have to be able to prove that they took every step possible to ensure you were in fact a solid borrower qualified for the mortgage.  

 Honestly it boils down to this.  If you were lending someone $350,000 wouldn’t you want to make sure they could afford to repay you?

So back to down payment sources. When you are providing documentation for your mortgage it is going to have to be pretty clear.  It will have to show your name, financial institution holding said asset, account number and all transactions into the account for the past 90 days.   Any deposits over $500 will have to be properly accounted for as per the above rationale.  A quick reminder that you will have to have at least 5% to put down and an additional 1.5% for the closing costs so 6.5% all together though these days the banks and the mortgage insurers really like to see additional savings just in case you experience a job loss or illness.

Here are the most common and acceptable down payment sources and how each is to be verified.  Keep in mind that you can use a combination of them but you will have to provide verification of each.

  1. Savings – All accounts will need to be verified via a 90 day history
  2. TFSA – Must be verified via a 90 day history
  3. RSP- Will require a 90 day history and in most cases verification that the funds have been redeemed via the forms to the RSP provider and have been deposited into your account
  4. Gift – from an immediate family member.  Need to see a signed gift letter stating it is in fact a gift which is not expected to be repaid and proof it has been deposited to your account.  In some cases they will want to see the source of the gift which means a statement from the person giving you the funds.
  5. Loan – You can use borrowed funds for your down payment through certain lenders.  They will need to verify the terms of the loan if it is new to make sure you can afford both it and your mortgage.
  6. Credit Card/Line of Credit – This is similar to the loan as above but in this case you usually only have to prove you can afford the payments for both.
  7. Sale of Asset – You can sell anything you own but make sure you document it properly.  Bill of sale, copy of the cheque and proof it has been deposited to your account. 
  8. Gifted Equity – If you are purchasing the home of a family member and they wish to, they can gift you the equity in the home and this can be used as the down payment.
  9. Inheritance – This is usually verified via the documents form the lawyer with corresponding deposit to your account

Sometimes I get questions about rare occurrences such as a lotto win.  Even in this case, which I have actually seen, there is a paper trail.  

So called mattress money is no longer acceptable unless you can show you have held it in a traditional account for the 90 days.

Banks and mortgage lenders are stuck abiding by the rules which mean that so are we all.  Until next time, have a great week.

What the Heck is Mortgage Default Insurance

General Pam Pikkert 18 Jul

What the heck is Mortgage Default Insurance Anyway?

                So when you are getting a mortgage you start to learn about terms that you become somewhat familiar with but only because they seem to be forced upon you.  This week I am going to take a look at mortgage default insurance and everything you should know.

Mortgage default insurance protects the mortgage lenders in case you default on your mortgage but the cost is yours I’m afraid.   If a default were to happen, the mortgage insurer has guaranteed that the lender will not take a loss on the loan.  There are 3 mortgage insurers in Canada.  We have the Canada Mortgage and Housing Corp. AKA CMHC, Genworth and Canada Guaranty.  They all work in the same way really but have slightly different criteria as to which loans they will insure.

Most of the time we think of mortgage default insurance as for borrowers putting less than 20% of the purchase price down.   The premium amounts are calculated as follows:

Standard Premium Rate Chart

 

LTV Ratio

Premium Rate

Up to 65% 

       0.60%

65.01% – 75%

      0.75%

75.01% – 80%

      1.25%

80.01% – 85%

      1.80%

85.01% – 90%

       2.40%

90.01% – 95%

       3.60%

 

 

This is the base line for the premium rates.  There will be an increase for self-employed people who cannot verify their employment income as per traditional guidelines.  There will also be an increase premium if you are purchasing a second home as a vacation property or for a family member.

The math is calculated as follows:

Purchase price less the down payment plus the mortgage insurance premium.  The total amount becomes what you are borrowing from the lender though so that you do not have to come up with that premium out of pocket.

If you end up selling and moving within the first 2 years you can port a percentage of the premium with you so that you do not have to incur the entire amount again.

One thing many people are unaware of is that even if you put the full 20% down, the lender may apply for the mortgage default insurance anyway.   This is to increase the security they and their investors have in regards to the mortgage.  Most of the time the insurance premium in these cases are covered by the lender but in special circumstances, such as a rental property, you may still be required to pay it.

The mortgage insurers are backed by the Government of Canada which means that our government is actually guaranteeing the loan.  This exposure to the housing market is why they keep stepping in to change the mortgage rules and why it seems harder and harder to qualify these days.

One perk to the whole thing is this.  If you are having trouble making your mortgage payments because of illness or job loss, you have a strong ally in your corner.  It is far less costly for a mortgage insurer to attempt to work with you then it is for them to cover the costs of you defaulting.   At the first sign of trouble call you lender and figure out which mortgage insurer you are with so you can get them on board.   No one wants to see you lose your home.

So there you have it.  Mortgage default insurance in a nutshell.