Deals fall apart from time to time due to down payment not being “sourced and seasoned.” This means the borrower couldn’t prove where the money came from, and provide a reliable track record of the funds. Down payment is important to the banks! It is a vital part of the deal, and cannot be borrowed from friends and credit cards unless you qualify. How do you know if you qualify? You need to retain the services of an Accredited Mortgage Professional, and I can help you.
This video blog explains what forms down payment can take, and how it will be treated by the banks.
Transcript of Video Blog:
Hi, everybody. Rowan Smith with The Mortgage Centre. I’m going to talk today about down payment.
I was in the gym, and I was running on the treadmill, beside a couple of people who were talking about buying a home, recently. The one was lamenting to the other that the whole deal had fallen apart, simply because of their down payment. I immediately, of course, had to listen in on this conversation and eavesdrop.
The gist of it was that they were borrowing some of money from a friend, and a little bit of money from their parents. They were going to pay it all back and they had the money to pay it all back, but it wasn’t clearly documentable to them. So whoever was handling the financing just got squeamish about it and decided that they didn’t want to do it.
Now, this brings me to the point of “How important is down payment?” Well, it’s vital. It’s the capital you’re putting into the deal, the security. It’s your skin in the deal, if you will. It’s what’s going to hurt, or not going to hurt, if you walk away or get foreclosed on. Naturally, the source of that down payment is very important.
If you’re trying to borrow that money from somewhere, you can do so — so long as you can service the debt that you’re taking on as the mortgage, and the debt that you’re taking on to bring the down payment in.
A lot of people will use five percent down. They’ll borrow it from a line of credit or a credit card. They’ll say to me, “Well, here you go. Here’s the down payment.” I say, “Where did you get it from?” They go, “Well, I took it from my line of credit.” I go, “Well, uh-oh. OK, well, you didn’t. You barely qualified for the purchase, but now you don’t qualify because you’ve got another payment you have to build into it.”
The client is going, “Well, I can afford it.” Now, you might be able to afford it, but you’re not qualified for it. The bank has very specific guidelines on this fact. You’re allowed to borrow the down payment, but you have to be able to qualify for it.
You do pay a slightly higher CMHC premium as well, if you’re borrowing the down payment — whether it’s from parents or wherever else. A better move is to have your family gift you those dollars.
If your family’s trying to help you to buy a home, have them write up a gift letter. We can provide it to you. It just simply says that this is not a repayable loan. As long as that’s the truth, there’s nothing wrong with getting money gifted to you.
But gifts have to really come from people that you reasonably get a gift from. I don’t get a gift from one of my buddies. I get a gift from mom, or dad, or sister, or grandparents. We direct really a blood relation, with one step away from you — your mother, father, sister, or your grandparents, in that case. So a gift of down payment is fine.
Alternatively, you could be looking at your own savings. Now, we often have to prove where those savings have been. If you’ve been transferring money all over different accounts, it can get very confusing, so don’t do that.
What you want to do is, if you’ve got your statements, leave them in the account that they’re going to sit in. The banks are typically going to want anywhere from 30 to 90 days — usually 90 — of history of those down payment funds. Where were they? You may say to them, “Well, why does it matter where they were?” Why does the bank even care?
Well, the bank has an obligation to make sure that the funds are not coming from some illegal source, or proceeds of crime, that you didn’t get the money from a drug sale or human trafficking. I know it sounds extreme, but this is what they actually have to look for.
They have to make sure that these dollars are legitimate funds that are in a bank account that have cleared all of the fin track regulations, which involve the money laundering, and proceeds of crime, and all of that.
When we ride you about, “Hey, we need bank statements,” and, “Hey, we need proof of where you’re down payment is coming from,” first, you should expect it, and B; We, as brokers, don’t care where your down payment is coming from. We just want to get you the best mortgage we can, at the best rates, and we want to get you in there as easily as possible. We’re not here to make your life difficult.
The banks, unfortunately, have an obligation. We just have to pass that obligation on to you. If you have any questions about down payment — what’s acceptable, what’s not — give me a call.
My phone number is 604-657-6775, and I’m Rowan Smith for The Mortgage Centre.