Verifying Your Down Payment

General Marlies Romich 15 Jun

HOW TO VERIFY YOUR DOWN PAYMENT WHEN BUYING A HOME

Saving for a down payment is one of the biggest challenges facing people wanting to buy their first home.
To fulfill the conditions of your mortgage approval, it’s all about what you can prove (hard to believe – but some people have lied in the past – horrors!).
Documentation of down payment is required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which changes your lending ratios and potential your mortgage approval.

DOCUMENTATION REQUIRED BY THE LENDER TO VERIFY YOUR DOWN PAYMENT

This is a government anti-money laundering requirement and protects the lender against fraud.

1. Personal Savings/Investments: Your lender needs to see a minimum of 3 months’ history of where the money for your down payment is coming from including your: savings, Tax Free Savings Account (TFSA) or investment money.

  • Regularly deposit all your cash in the bank, don’t squirrel your money away at home. Lenders don’t like to hear that you’ve just deposited $10,000 cash that has been sitting under your mattress. Your bank statements will need to clearly show your name and your account number.
  • Any large deposits outside of “normal” will need to be explained (i.e. tax return, bonus from work, sale of a large ticket item). If you have transferred money from once account to another you will need to show a record of the money leaving one account and arriving in the other. Lenders want to see a paper trail of where your down payment is coming from and how it got into your account.

 

2. Gifted Down Payment: In some expensive real estate markets like Metro Vancouver & Toronto, the bank of Mom & Dad help 20% of first time home buyers. You can use these gifted funds for your down payment if you have a signed gift letter from your family member that states the down payment is a true gift and no repayment is required.

  • Gifted down payments are only acceptable from immediate family members: parents, grandparents & siblings.
  • Be prepared to show the gifted funds have been deposited in your account 15 days prior to closing. The lender may want to see a transaction record. i.e. $30,000 from Bank of Mom & Dad’s account transferred to yours and a record of the $30,000 landing in your account. Bank documents will need to show the account number and names for the giver and receiver of the funds. Contact me for a sample gift letter.

3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.

  • Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home. The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.
  • If you buy a qualifying home together with your spouse or other individuals, each of you can withdraw up to $35,000.
  • You must repay all withdrawals to your RRSP’s 15 years. Generally, you will have to repay an amount to your RRSP each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year (i.e. $35,000/15 years = $2,333.33 per year), it will be added to your income for that year.
  • Verifying your down payment from your RRSP, you will need to prove the funds show a 3-month RRSP history via your account statements which need to include your name and account number. Funds must be sitting in your account for 90 days to use them for HBP.

4. Proceeds from Selling Your Existing Home: If your down payment is coming from the proceeds of selling your currently home, then you will need to show your lender an accepted offer of Purchase and Sale (with all subjects removed) between you and the buyer of your current home.

  • If you have an existing mortgage on your current home, you will need to provide an up-to-date mortgage statement.

5. Money from Outside Canada: Using funds from outside of Canada is acceptable, but you need to have the money on deposit in a Canadian financial institution at least 30 days before your closing date.  Most lenders will also want to see that you have enough funds to cover Property Transfer Tax (in BC) PLUS 1.5% of the purchase price available in your account to cover your closing costs (i.e. legal, appraisal, home inspection, taxes, etc.).

  • Property Transfer Tax (PTT) All buyers pay Property Transfer Tax (except first-time buyers purchasing under $500,000 and New Builds under $750,000). This is a cash expense, in addition to your down payment.
    Property Transfer Tax (PTT) cannot be financed into the mortgage

Buying a home for the first time can be stressful, therefore being prepared with the right documentation for your down payment and closing costs can make the process much easier.

Mortgages are complicated, but they don’t have to be. Contact a Dominion Lending Centres Mortgage Professional near you.

KELLY HUDSON
Dominion Lending Centres – Accredited Mortgage Professional
Kelly is part of DLC Canadian Mortgage Experts based in Richmond, BC

Qualifying Rate Decreases – Q1 2020

General Marlies Romich 15 Jun

Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.”  That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

If you have any questions about what the qualifying rate is and how it affects you, reach out to your local DLC Mortgage Broker and we’d be happy to chat!

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

Addbacks and Offsets: Qualifying for Rental Investments

General Marlies Romich 28 May

Addbacks and Offsets: Qualifying for Rental Investments

It may sound like we’re talking about football formations here, but if you are considering the purchase of a rental property or already own a rental property, knowing about addbacks and offsets is an important concept to understand when qualifying for your next mortgage. Addbacks and offsets are two different methods for accounting for the rental income from an investment property.

Before I explain the differences and provide an example of how these two methods impact your mortgage qualification, note that regardless of the method, lenders use only a percentage of the rental income in the equation and for most lenders this percentage is 50% of the rental amount. This is just fine if your employment income is high enough and you have a significant down payment and a small amount of other debts. But this treatment isn’t going to make the investment opportunity work for many people. As a mortgage broker and a real estate investor myself, I feel the frustration of this 50% approach. Imagine a strategy to own a rental property for 10 years but assuming it will be vacant for 5 of those years. That’s what the 50% assumption would suggest, and that just doesn’t make sense. Fortunately, some lenders use 60% of the rental income, a few use 80%, and I know of one lender that actually uses 100% of the rental income. The difference between 50% and 100% has a significant impact on your overall qualification as 50% of the rental income can make a rental property look like it’s losing money when it’s actually cash flow positive.

Similarly, there is also a big difference between the addback and offset methods. Many lenders use the addback method to account for the rental income on investment properties. What this means is that they will add the rental income to the rest of your income in order to calculate your ability to make payments on the mortgage and other debts, hence the term addback. Now if rent is $1,600 a month ($19,200 per year), this is not going to add a lot to the mortgage amount you qualify for. On the other hand, an offset approach does far more for you to qualify and is the more favorable of the two approaches. An offset applies the monthly rental income against the monthly housing costs, and only the difference must be covered by your other income. The monthly rental income used in the calculation is based on the percentage of income used by that particular lender, and the housing costs refer to the mortgage payments, property tax, heating costs, and half of the maintenance fees if the investment property is a condo or townhome.

An example is the best way to understand the real impact of these two methods: Assume a couple earn $100,000 a year in household income, the rental property they wish to purchase is a condo for $380,000 with expected rental income of $1,600, and they are requesting a mortgage of $300,000. Factoring in some reasonable estimates for their existing property, a car loan, and the property tax, heat, and maintenance fees on the rental property, the addback approach using 50% of the rental income would result in their mortgage application being declined. In fact, it would suggest they need to earn $110,000 per year to qualify. Yet the offset approach using 50% of the rental income would indeed allow them to qualify. In fact, it would allow them to qualify if they earned $96,000 per year. Touchdown! The offset method versus the addback method can be the make or break of whether an investment opportunity becomes a reality for this couple trying to get ahead in building their wealth through real estate. Their employment income would need to be $14,000 or 15% higher under the addback method – when was the last time you got a 15% raise?

Mortgage brokers like myself know the policies of each lender we work with and can balance the likelihood of qualification under different rental income treatments while finding a mortgage that prioritizes the four mortgage strategies that every mortgage should consider: lowest cost, lowest payment, maximum flexibility, and lowest risk.

Give your local Dominion Lending Centres mortgage broker a call to assess how to finance your rental investments!

Todd Skene
Dominion Lending Centres – Mortgage Professional