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Frequently Asked Questions on Downpayment
- What can I use for a down payment to buy a property? What are the common acceptable sources of down payment?
- What are other options for getting financing?
- What is the minimum down payment needed to buy a property?
- How can you use your RRSP to help you buy your first home? What is the Home Buyer's Plan (HBP)?
- What is needed to verify my down payment?
What can I use for a down payment to buy a property? What are the common acceptable sources of down payment?
At least 5% of the purchase price needs to come from your own resources or gifted by an immediate family member, and cannot be borrowed. Typical acceptable sources of down payment are the following:
- Accumulated Savings
- Equity from an existing property
- Proceeds from sale of another property
- Non-repayable, gifted funds from an immediate relative
- Line of Credit
- Registered Retirement Savings Plan (RRSP) withdrawal – up to a maximum of $20,000. Please read answer to question about Home Buyer’s Plan (HBP) below.
- Equity grant (Non-repayable grant from federal, provincial or municipal agency)
What are other options for getting financing?
You may assume an existing mortgage as part of the price you pay for the property. Assuming a seller’s mortgage means taking over the monthly payments. It saves you money normally spent on having to arrange for your own mortgage such as legal and appraisal fees.
Another way is to do a Vendor-Take-Back (VTB). A VTB is where the seller of the property lends you the money to buy the property itself. In exchange for lending you the money, the seller obtains regular payments from you based on an agreed interest rate.
Other options may include sweat equity and obtaining funds from Joint Venture partners especially when buying investment or rental properties.
Depending on the lender, any of the above ways can be used to add to the down payment from your own sources in order to obtain more financing from most lenders.
back to topWhat is the minimum down payment needed to buy a property?
If your mortgage is insured, a minimum of 5% down payment is usually required to purchase a residential, owner-occupied home. Ten percent is required for multi-unit (up to 4 units) family dwellings in which you occupy at least one of the units. However, in order to qualify, your credit must be in good standing and you must meet the lender’s eligibility requirements regarding income, employment and credit worthiness. For conventional mortgage, you need to put down at least 20% of the purchase price.
In addition to the down payment, you must be able to show enough funds to cover closing costs, which usually 1.5 to 2 % of the purchase price.
back to topHow can you use your RRSP to help you buy your first home? What is the Home Buyer's Plan (HBP)?
The Home Buyer’s Plan is a federal government program that allows each home buyer to draw out up to a maximum of $20,000 from his/her RRSP to add to the downpayment or pay for closing costs for buying his/her home. That’s $40,000 for a couple.
The funds must have been invested in the RRSP account for a minimum of 90 days before withdrawal. They are non-taxable as long as the RRSP account is repaid the same amount within 15 years (or less) with minimum 15 equal annual installments. The buyer must not have owned a principal residence within the last 5 years and he/she intends to occupy the property, which must be located in Canada, as a principal residence for at least one year.
Even if you have already saved up $20,000 or more to buy a home, you may use the HBP to save on taxes if you have enough "contribution room" in your RRSP. For example, you may put $20,000 of your income in the RRSP plan 90 days prior to closing, then withdraw the money through the Home Buyer’s Plan by closing to add to your downpayment. What this does is make your $20,000 contribution count as deduction to your taxable income and you end up paying less tax on that year. You may then use the tax refund for other expenses or repaying your HBP.
back to topWhat is needed to verify my down payment?
The following is needed to verify downpayment:
- Down payment from Proceeds obtained from the Sale of an Existing Property:
- Copy of the unconditional "Purchase and Sale Agreement" on the sold property.
- Copy of the Statement of "Mortgage Balance" on any mortgages presently held against the sold property
- Down payment from a Gift:
- Gift letter stating the name and contact information of the donor, the relationship of the donor to the borrower, and that the amount given is a genuine gift that does not need to be repaid. For a copy of the gift letter, check out the "Client Resources" under "Resource Links" of the "Learn More About" section of the site.
- Written verification that the funds are in the borrower’s possession by showing the borrower’s deposit slip and/or bank statement with the amount credited to his account within a certain time period before closing.
- Down payment from your own sources:
- Written verification of accumulated, non-borrowed savings – this could be in the form of a copy of your bank book showing a balance equal to the stated down payment and at least three (3) months’ banking statements showing accumulation of such funds. If the source of funds are from a recently sold GIC, stocks or bonds, receipts must be shown to prove this source.
