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Monday, November 7, 2011

Buying a Home? What you need to know about your Downpayment!

You’re downpayment is essentially your initial contribution toward purchasing a property.  A downpayment not only gives you a bit of ownership in your property but also gives the eventual mortgage lender a greater sense of security as you are invested in the property and have something to lose should you not be able to meet your mortgage commitments.


How much of a downpayment do you need?

In general, the minimum downpayment to purchase a home is 5% of the purchase price.

NOTE: It is still possible to obtain a “Zero-Down” mortgage...Click here for info!  

While 5% is generally considered the minimum, lenders may ask for a larger downpayment in circumstances where the applicants(s) are self-employed, have insufficient employment history, have insufficient or poor credit history or when purchasing a rental property.  

Proof of Downpayment Funds

If you are purchasing a pre-owned home, you will need to prove that you have the downpayment funds in your bank account / investments account etc (via 90 days of bank / investment statements) during the mortgage approval process.  

Where are the funds for your Downpayment coming from?

Lenders have very strict rules when it comes to downpayments coming from third party sources to guard against fraud and money laundering.  

It is possible for others to contribute part or the entire downpayment toward the purchase of your home. This is referred to as “gifted downpayment”.  A gifted downpayment can only come from an “arm’s length” relative, so it must come from your Mother, Father, Sister or Brother.


Lenders will also require a signed “Gift Letter” stating the exact amount of the gift and that the gift does not have to be repaid.

Some lenders will also require verification of where the gifted funds are coming from, like dad’s investment statement or Bank account.  The borrower will also be asked to show the lender the actual transaction of the funds being deposited into your bank account.

In cases where down-payments monies are gifted, lenders will often want to see that the borrower can personally support and strengthen the application by having solid employment, good, established credit and that they have saved their own monies to cover the closing costs. This is actually a requirement as closing costs cannot be gifted.

It is not uncommon for clients to overlook some of the guidelines and restrictions pertaining to the source and amount of their downpayment.   This can create headaches for both the potential homeowner and the Realtor and can actually result in you losing out on a home you really wanted.


Domenic Mirabelli
Mortgage Intelligence
416.303.4480
domenic.mirabelli@migroup.ca

“Helping you find a mortgage...and peace of Mind”

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