Whether you’re a first time homebuyer, or a seasoned home buying pro, purchasing a new home can be an exciting time. Once your offer has been accepted, the next step is to get your mortgage in place.  This process can seem quick and easy, or it can become long and drawn out, leading to additional stress and aggravation. But why is it that sometimes it’s so simple, while other times it’s drawn out and frustrating?  

Every mortgage can have different requirements, depending on your situation.  One of the biggest areas of potential frustration can be around the source of your down payment. By having a better understanding of what the mortgage lender will be looking for, as well as the reasoning, you can make the process much easier for your mortgage professional, which in turn, makes it much easier on yourself. 

But why do mortgage lenders care where the down payment is coming from?  

What is it to them?  

You showed them a statement confirming the funds are in your account and that should be good enough for them. Right?  

The reason why mortgage lenders are so particular about the source of your down payment is  because they are required to be in compliance with anti-money laundering legislation. More specifically, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. It doesn’t matter if you’re dealing with a major bank, monoline lender, trust company or credit union, mortgage lenders are required to show a paper trail for the source of funds covering a period of 90 days. 100% of the down payment and closing costs need to be accounted for and documented.  If the lender were to be audited, and they did not have adequate support for the down payment in your file, then they face severe consequences. 

This is why you’ll be asked for bank statements covering a 90 day period.  If there are any large deposits of $1,000 or greater (payroll excluded), then you’ll be asked to show support for those deposits. For example, if your statements show a $5,000 transfer, then the lender will need to see a 90 day history from the account the funds were transferred from. The source account. If the new statements provided show another transfer of $10,000, then the lender will need to see a 90 day history from the source account for that transfer as well.  This can go on and on, which can lead to additional stress and frustration to the borrower. 

“Why does this lender need so much from me?  They tell me they only need to see one more statement and then they continue to ask for more and more!”  

Completely understandable! But until your down payment is fully accounted for and documented, the requests will unfortunately continue. They need to. 

By having a better understanding of what lenders are looking for, you can nip this in the bud, and eliminate any additional requests from the beginning by ensuring that the full down payment is supported with the statements provided.  This alone can eliminate additional stress and make the mortgage arrangement process much more enjoyable.  

 

Smaller Deposits
Deposits under $1,000 are generally overlooked, however lenders may still ask. If there were multiple deposits under $1,000, then you may be asked for the source of these deposits. For example, if you had a $200 deposit showing every day for 20 days, then this would be considered unusual activity. While the deposits are under $1,000, the unusual activity would trigger the lender to ask about the source. 

 

Closing Costs
In addition to your down payment, mortgage lenders are also required to show evidence of 1.5% of the purchase price to put towards your closing costs (land transfer tax, lawyer fees, mortgage registration, etc). Note that the 1.5% is not an estimate of your actual closing costs, which can be significantly different. It’s just what mortgage lenders are required to show evidence of. I would recommend reaching out to your lawyer to get a more accurate idea of what you can expect to pay for closing costs, which can vary depending on the location of the property being purchased. 

 

Down Payment Requirements for New Build Purchases
If you’ve purchased a pre-construction property from a builder, then you likely provided the bulk of your down payment (if not all of it) to the builder long before the 90 day period. In these situations, the lender will require copies of the cheques you provided to the builder, along with the builder receipt. This demonstrates that the builder received the cheques, but doesn’t provide the lender with confirmation that they went through. For this reason, lenders also require a copy of the statement of adjustments from the builder, which confirms the total amount of the deposit received. It’s common for builders to wait until only a few days before closing before they will release this document, however this is expected, and will not present any issues with your closing.

 

How To Make Things Easier
The easier you make it on the mortgage professional, the easier it will be on you. By understanding what mortgage lenders are looking for, you can go through your statements on your own and ensure that all the deposits and transfers are supported with additional bank statements, or other supporting documentation (depending on the source of the deposit). You may want to consider putting together a simple guide explaining each deposit, its source, along with the additional bank statements to support it. This can eliminate the need for additional requests / questions about your statements, therefore giving you a much better experience with the mortgage process. The more clear and concise you can be, the easier the process for all parties involved, which of course includes you. This can also result in a faster turnaround from the lender as well. 

 

How to Prepare Your Down Payment Documents Prior to Your Home Purchase
If you are planning on purchasing a home and you have multiple bank and investment accounts, then you may want to consider moving all the funds into a single account ahead of time. This way, when your down payment confirmation is required, you only need to provide three monthly statements, each showing a similar balance month after month, with no additional deposits or transfers. This makes it a joy for us as your broker, and a joy for the lender’s underwriting department as well. Not to mention, a joy for you! 5 minutes of review and your down payment condition can be satisfied, with no additional requests. Multiple transfers and deposits over various accounts can literally create hours of additional work for the broker, as well as the lender. Not to mention, they usually lead to additional questions for you, as well as additional document requests.  

 

Document Requirements For Other Common Sources of Down Payment

RRSP
If you are using your RRSP for down payment, then a 90 history of RRSP statements will be required, along with support of any deposits into this account. The same rules apply as explained above. The RRSP will need to be withdrawn and deposited into your chequing account no later than 10 business days before your closing date. The lender will need to see your RRSP statement showing the funds being withdrawn, along with the chequing account statement showing the funds being deposited. As it can take a few business days for the funds from the RRSP to appear in your chequing account, it’s best to initiate the transfer no later than  15 business days before closing of the home purchase. 

 

Sale of property
If the down payment is coming from the sale of your property, then you’ll need to provide a copy of the accepted offer of the sold home, along with any amendments and waivers (if applicable).  If the closing date of the sale is later than the closing date of your purchase, then you would also need to provide the MLS listing for the sale, as this is required to set up your bridge loan. This is a short term loan covering the portion of the down payment coming from the sale of your current home. Since you will not have the funds from the sale in time to close the purchase, this short term loan ‘bridges’ the gap… hence the name ‘bridge loan’. 

If the closing date on the current property occurs prior to the closing of the new purchase, then you’ll be required to provide a bank statement showing the proceeds being deposited into your account, along with the trust ledger you received from your lawyer. The trust ledger is usually a single page, simple document that indicates the breakdown of funds received from the sale, and therefore verifies the source of the deposit into your account. 

Even if 100% of the down payment is coming from the sale of property, a 90 day history of bank statements may still be required to show the natural accumulation of your deposit. 

 

Gift
One of the most common sources of down payment for first time homebuyers is a gift from family. The donor will need to fill out a simple gift form (also referred to as a gift letter), and you’ll need to provide a bank statement showing the gift being deposited into your account no later than 10 business days before closing.  A 90 day history of bank statements from the donor is generally not required, however lenders can still ask for them on occasion. This is rare when the donor resides in Canada.  If the donor is from outside of Canada, then the lender will need to know which country the gift is coming from. Some countries may be more scrutinized than others.  In addition to the gift letter, you’ll need to provide a copy of the wire transfer, along with your bank statement showing the funds being deposited. A 90 day history of bank statements will often required from the donor account in these situations, but this requirement can vary from lender to lender. 

Gifts are accepted from immediate family members only. Parents, grandparents, or siblings.  Gifts from cousins, aunts, uncles, boyfriends, girlfriends and friends will not be accepted. “But my aunt raised me and is like my mother!”. In certain situations, exceptions can be made, however these would be granted on a case-by-case basis. 

 

Borrowed Down Payment
Down payments from HELOCs (Home Equity Line of Credit) is another acceptable form of down payment. This is a bit easier, as all lenders will require is confirmation that there is room on the HELOC to cover the down payment. The portion of down payment coming from the HELOC will need to be included in your debt-to-income ratio for qualifying.  This is calculated based a rate of 4.79% amortized over 25 years, regardless of the actual payment amount. 

Down payments borrowed from unsecured lines of credit are not accepted by most mortgage lenders, however there are some who do allow it. The mortgage product that allows this type of down payment is referred to as a Flex Down.  3% of the portion used for down payment will need to be factored into your debt-to-income ratio for qualification.  

 

Unacceptable Sources of Down Payment
In order for lenders to remain in compliance with anti-money laundering legislation, there are some forms of down payment that are not accepted. This include (but are not limited to): 

  • Gifts from non-immediate family members
  • Gifts from friends 
  • Loans from friends or family 
  • Cash ‘under the mattress’

 

Other Forms of Down Payment
Mortgage lenders will always be looking for an explanation of any deposits, along with any available support for the deposits.  Sale of a car, an insurance claim, inheritance, etc, are all acceptable. You would just need to provide documentation to support the deposit. 

Remember, you’re being lent hundreds of thousands of dollars, so mortgage lenders will want to ensure that they are diligent in ensuring that your down payment confirmation is in order.   

 

                                                                                    Conclusion
This should give you a much better understanding of what a lender will require to support your down payment, as well as the reasoning. Mortgage lenders have strict rules that they need to follow, and sometimes a mortgage lender’s request can seem ridiculous at times. Believe me, there are many times when they DO make ridiculous requests!  In these situations, we’ll be quick to express our opinion to the lender and get the request waived wherever possible. It’s important to me that we give you a better experience with your mortgage than you’ll get anywhere else, and we’ll do anything we can to make that happen!