When you are buying a home, one of the biggest up-front expenses is the down payment. Not to be confused with closing costs, the down payment is the portion of the purchase price that you pay upfront at closing.
How large does my down payment have to be?
In Canada, the maximum financing available on a property is 95% of the purchase price. You must have at least the remaining 5% along with closing costs.
Generally, if you have a larger down payment, you’ll pay less in fees and interest over the lifetime of your mortgage (and vice versa). Higher down payments will also give you a lower loan to value ratio or LTV. Lenders use your LTV to assess your borrower risk and so typically, the lower your LTV, the better.
A lower LTV can mean a lower interest rate on your mortgage and help you avoid paying for private mortgage insurance as you are seen as less of a risk to lenders.
Let’s have a look at the possible places that you could source your downpayment and how you can be eligible for financing.
Where can I get my down payment from?
Line of credit. This can be from the same bank you are getting your mortgage from. However, it is important to be aware that this will mean that you are subject to a larger stress test.
Personal Loan. This is a good option if you are in great financial standing but don’t want to wait to purchase a house.
Borrowing from an immediate relative. Bear in mind you will need a signed gift letter for this option that states that the money is a gift and does not have to be repaid.
Government programs. Depending on what province you live in, special government programs can provide lower-income families with down payment assistance.
Canadian Child Tax Benefits. The Canadian Child Tax Benefits and income from a non-residing immediate family member (Co-signer) can be used to help qualify.
What do I need to be eligible for financing?
You must have a good credit score, typically this is of at least 680. Each lender has their own requirements, we can work with you to make a plan to raise your score.
Lenders like to see stable employment. For example; 2 years in the same line of work and a minimum of 6 months if you are with a new company. If your hours are not guaranteed or you are self-employed, then you will need 2-years proof of your earnings.
You must be able to cover the closing costs with your own resources. These include property transfer tax, appraisals, legal fees, property tax adjustments, etc.
Now that you know the basics of down payments, and what you need to be eligible for financing, reach out to our team to get started.