Downpayment Options For Your Real Estate
The amount of downpayment you put on a property affects the mortgage rate and insurance fees you may need to pay. Depending on whether you are living on the property, renting it out, or "flipping" it, there are several options available on how you can get enough funds to put as your downpayment that is allowable to most lenders. For financing owner-occupied residential properties with conventional lenders, 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 another existing property you own
- Proceeds from sale of your home (if moving residences) or another property
- Non-repayable, gifted funds from an immediate relative
- Line(s) of Credit
- Registered Retirement Savings Plan (RRSP) withdrawal - up to a maximum of $25,000 per applicant. Please read our article on Canada's Home Buyer's Plan (HBP).
- Equity grant (Non-repayable grant from federal, provincial or municipal agency) - see our Resources Links page to find out available programs you may be able to access.
Other options to consider are:
- 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. An important thing to note is that VTB's are allowed by most banks up to only 15% of the property value. In almost every case (of obtaining a VTB as part of downpayment), the lender wants to see at least 10% of the borrower's own money into the deal, which means a total of 25% downpayment and 75% financing from the lender.
- Joint Venture partners are also a good source of downpayment especially when buying investment or rental properties.
- Consider lease-to-own properties where part of your rent accumulates over time into downpayment given to your landlord/seller, until you are ready to buy. However, lease-to-own properties should be approached with caution. Before signing the lease-to-own contract, we recommend you speak to your lawyer. It's also a good idea to speak to us first about eventually getting a mortgage for the house once you decide to buy it. Many times, renters in those arrangements find out they can't buy the place at the end of their lease, usually for the exact reasons they couldn't buy it at the beginning of their contract (e.g. bad credit, insufficient income, etc.). The worse part is that, in the end, they have already spent so much more for paying higher than average rents in order to accumulate downpayment.
Depending on the lender, any of the above ways can be used to come up with a downpayment for your purchase, sometimes in combination with other options. In order to find out the documents required as proof on any of the above sources, read our article on Preparing the Documents You Need To Submit For Your Mortgage Application.
