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Down Payment Rules – Source and Seasoning – Document Requirements

Transcript of Video Blog:

Hi, everyone. It’s Rowan Smith from the Mortgage Centre. I’m going to rehash some old material because I keep running into problems with it recently.

It regards the down payment. When you’re buying a home, people often think, “Well, I’ve got the down payment, so now I just have to qualify for the mortgage”. But the source of that down payment is oftentimes as important as the source of your income.

Now let me give you a couple examples of things that are acceptable. If a bank sees that you’ve recently sold a property, when you sell it you’re going to be given, from your lawyer or notary that represents you, a statement of adjustments and an order to pay.

This is a document that breaks down where all the funds went: some went to pay out your bank, some went to pay out legal costs, etc., and then the balance will be payable to you.

So let’s say you had $100,000 left over. Now you went and bought another place, and you wanted to put $100,000 down. Well, that’s perfect. It’s a very clear track record that the dollars were yours in your name. They weren’t borrowed, and they weren’t from any proceeds of crime. That’s really what the banks are going to be looking at.

Now another thing that would be acceptable would be bank statements showing the accumulation of funds over time, showing at least 90 days, and 90 days is the industry average. You’re going to be asked for this anywhere you go.

Now if you’re dealing with your own bank, they may not ask you for it, but it’s because they can actually see it on your account themselves. Rest assured, they will be looking for a 90-day history of your down payment to see where it comes from.

There are a couple of institutions out there that make exceptions depending on specific programs, but by and large, 90 days’ bank statements.

Now if you’ve got more money stored in ING and some other money at TD Canada Trust, some at CIBC, and you decide you’re going to shift it all into one account and then you go and do your mortgage application, you’ve made a lot of work for yourself because you’re going to have to get 90 days’ bank statements for all three of those accounts and for whichever account you put it into showing the funds going there.

The banks need 90 days, and they’re going to chase you to see all that flow of funds to account for your down payment.

Now you may be thinking to yourself, “Well, listen. The bank’s got the money. The down payment’s there. What do they care?” They care because the source of your down payment could create contingent liabilities that aren’t really registered on the title.

What I mean is let’s say that a husband and wife, newly married, get some money from the dad of the girl that got married, and then a year from now, everything spins out of control and they end up getting divorced.

Well, technical that money should be split down the middle and go separately. But it really was a gift from the father to the daughter, so perhaps even the husband and wife are OK with that. But it doesn’t clear up the fact that there’s this murkiness as to where those funds came from.

Another issue is if you borrow the down payment. People will come to me and say, “Well, I don’t have any savings, but I’ve got a $20,000 Visa.”

I’m like, “OK, well, you need $10,000 of down payment because you’re buying a $200, 000 home. So you need five percent.”

They say, “OK, I could take $10,000 off of there.”

I say, “Well, wait. This could present a problem. The reason it could be presenting a problem is because now you have to qualify for the mortgage and the credit card debt.”

Credit card debt they look at, and they assume you have to pay three percent of the balance. So on $10,000, that’s $300 a month that they’re looking at. Well, that reduces what you qualify for on the mortgage side by about $70,000 at today’s rates.

So is it cheaper for you to just pay a slightly higher rate and get a cash-back mortgage, or is it cheaper for you to pay the lowest possible rate and borrow some money maybe at 18 percent off your credit card?

Sure, everybody has the best of intentions and they think they can pay that portion back. But oftentimes that isn’t the case, and they end up holding that credit card debt and just rotating it and paying it and paying it on the long-term basis, which isn’t a great plan.

That’s not what the banks want to see. They don’t want to see no accumulation of the savings. They want to see savings behavior.

Again, you’re going to be asked for 90 days’ bank statements. You’re going to be asked to prove that it is your money, that it is not borrowed, and if it is borrowed, we have to factor that payment in.

If it is borrowed from some other source, we’re going to have to factor some sort of a payment in and prove that you’re going to be repaying these dollars.

So don’t think that you can just get a loan from your friend and a loan from your brother and that you’ll repay it back in the years down the road when you sell the property. That won’t really fly.

Now I can work with you to try to find the best way to do this, though. There are exceptions to some of these rules that I’ve explained.

But by and large, you have to leave that up to the professionals who work the with banks, because we know each individual bank, and we know which ones are stickier on this than others, and some that can make exceptions, and some that look at it a little more common sense.

If you’re in that situation, if you’re having trouble with a down payment, call me. It’s Rowan Smith from the Mortgage Centre.

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