For this month, we will be continuing to take a look at the five Cs of credit. To refresh your memories, the five Cs include credit, capacity (ability to make the payments), capital (down payment), character (length of employment, savings history and other factors that supplement credit history) and collateral (assets owned in addition to down payment). In previous columns we took a look at what lenders look at when reviewing credit and capacity, that is, the ability to make loan payments.
The next one we will explore is capital, which is the down payment required when purchasing a property. When looking at the down payment, there are basically two classes to look at, insured and uninsured. A down payment requires mortgage insurance when there is less than 20 per cent put down. If a borrower only has a five-19 per cent down payment, the lender is required to insure the mortgage with a mortgage insurer. The mortgage insurers commonly used are Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada and Canada Guarantee. They collect an insurance premium from the borrower at the time of mortgage (it is often included in the total mortgage amount), and then provide the lender with protection from losses in the event of default. These programs are designed to help people purchase homes without having a full 20 per cent to put down, and help to provide incentive lenders to take on these riskier loans because the risk is managed at no cost to them.
So, having looked at the mortgage insurance aspect of down payments, let’s take a look at the down payments themselves. This is where things can begin to vary a little bit because each lender may have slightly different criteria for what constitutes an acceptable down payment. I don’t have time to get into every different policy that each lender might have, so I will speak to what is broadly acceptable for forms of down payment.
Generally speaking, they want to see that the down payment is from your own resources. The simplest example would be a down payment from someone’s savings. For this, the lender will want to see a three-month history on the account that the money is coming from. The reason for this is to identify a savings history during that period, and to question any large deposits that are unexplained. If there is a large deposit, often they will want an explanation and documentation. One example might be that a person sold an extra vehicle or some other asset. For this scenario, the lender may want to see some documentation supporting this. If the money is coming from an RRSP, the lender will most often request a three-month history on the RRSP account, along with proof that the RRSP has been cashed out and deposited into a chequing account.
One exception to the requirement for a down payment from your own resources is a gifted down payment from a family member. Lenders and insurers will allow a down payment to be gifted from an immediate family member. The main thing that is stipulated with this form of down payment is that a gift letter is given stating that the money is not required to be repaid. Another exception can be a borrowed down payment. Depending on the debt service rations, loan to value, and other criteria, a lender may allow a borrower to borrow their down payment from another source such as a line of credit, unsecured loan, private loan agreement, etc., as long as the payment for this loan is included in the debt service ratios and they are still acceptable.
This has been a very broad overview on what lenders and insurers look for in a down payment when purchasing a property. If you would like to purchase a property, it is always best to go and sit down with a mortgage professional. I find that sometimes people aren’t even considering purchasing as an option because they don’t have a down payment sitting in their account. Upon review there may be a number of options. A mortgage professional will look at your whole situation and identify all of your options.
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250 402-3903 or dean_bala@yahoo.com.
