The down payment can be the most difficult and challenging part of buying a new home. If you are having trouble raising money for a large down payment you can still qualify with as little as 5% down.
In this instance, your mortgage will have to be insured by one of three default mortgage insurers, CMHC (Canada Mortgage and Housing Corporation), Genworth Canada or Canada Guarantee. If you have less then 20% to put down, your mortgage is considered to be high ratio. High ratio mortgages insured by one of those insurers and are charged a one time insurance premium of up to 3.75% of the total mortgage amount, depending on the size of your down payment and amortization. This amount can be paid in full at the lawyer’s office or added to the total cost of your mortgage. Most home buyers simply add this to the top of their mortgage and have it included in their mortgage payments. This insurance protects the lender in the case where the borrower can no longer pay their mortgage and goes into default. It helps to eliminate some of the risk for the lender which then makes it easier to qualify for mortgages with as little as 5% down.
Your down payment can come from several sources:
- It can come from savings
- It can come from investments
- It can be given to you from family
- It can come from your RRSP’s under the Home Buyers Plan
- It can come from the sale of goods
No matter where it actually comes from the lender will want to see documentation on it. Bank statements for savings, investments or RRSP’s. A letter from the family member giving you the down payment. Or, a bill of sale if you have sold a car or personal goods. It can also be any combination of the above. Please let your mortgage broker know where the down payment will be coming from so that they can tell you exactly what documentation will be required.
If you have a high ratio insured mortgage the insurers may ask that you have between 1 – 1.5% of the purchase price set aside for closing costs. You will be asked to prove that you have this money and it should be from your own savings not from a gift. This money is to be used to pay items such as your lawyer, your moving company or perhaps deposits on utilities. The intent is that you do not move into a home and put all those costs on credit.