One of the main questions I get from first-time homebuyers is, “Where do I find my downpayment?” With most of my first-time buyer clients, we look at a few downpayment options to buy a home.
What is a Downpayment?
A downpayment is an upfront payment that’s made when purchasing a home or other property. It is a portion of the total purchase price of the property and is usually expressed as a percentage.
In most cases, this is required to secure a mortgage and finalize the purchase. This is your financial commitment to the purchase.
The amount of your downpayment can vary depending on several factors, including the value of the property, the type of mortgage, and the lender's policies. These are the minimum downpayment requirements:
Depending on the type of mortgage you’re applying for, there are minimum requirements:
High-Ratio Insured Mortgage: 5% of purchase price
Conventional Mortgage: 20% of purchase price
Rental Property: 20% of purchase price
Typically, the larger the downpayment, the better the terms of the mortgage, including lower interest rates, and monthly payments.
The Most Common Downpayment Options
1. Personal Savings and Investments
Among the most straightforward options is utilizing your savings or investments.
This method requires your most recent three-month bank statements to demonstrate the history of your savings. Ensure that your bank or investment statement clearly displays your name and account number (no blanking anything out!)
The full downpayment amount must stay in the account for a minimum of 90 days. Large deposits from sources like vehicle sales within the last 90 days need proper documentation.
2. RRSPs and the Home Buyer’s Plan
As a first-time buyer incentive, buyers can benefit from tax savings by withdrawing up to $35,000 from their RRSP without facing withholding tax for their downpayment.
The advantage for first-time homebuyers is that you can re-contribute these funds over 15 years. As with personal savings, your RRSP statement should show your name and account number, and it should be recent.
Even if you're not a first-time buyer, you can still leverage your RRSP, but with applicable taxes.
3. Gifted Down Payment
A generous option involves receiving a downpayment as a gift from an immediate family member.
A lender typically requires a gift letter confirming the relation and the non-repayable nature of the gift.
Alongside the letter, providing a bank statement with the deposited funds is crucial. Ensure the gifted downpayment is deposited approximately 10 days before the closing date.
Other Downpayment Sources
1. Divorce Settlement
When going through a divorce, the division of assets may include the distribution of property and financial resources, including any settlement funds.
If you receive a settlement as part of your divorce agreement, you can use that money as part of your downpayment.
Not all lenders accept divorce settlement funds as a source, so let’s discuss your situation beforehand.
2. Inheritance
An inheritance is considered a legitimate source of funds for a downpayment by many mortgage lenders.
Before we can use these funds, it’s best to wait for the probate process to be completed. You will also need the necessary documentation that the inheritance is legally settled before starting the home purchase process.
3. Sale of a Vehicle or Other Asset
Selling a vehicle or other large asset, like tools or electronics, can also be a downpayment option.
Similar to personal savings, you’ll need to make sure the proceeds of any sale are in your account for at least 90 days.
This is just a short list of downpayment options for first-time homebuyers! If you have any specific questions about where you can find the funds for buying your first home, do not hesitate to send me an email.
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