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Down Payment Basics

By Sandra Grywul on Jun 26, 2011 in Canada, Mortgage

downpayment1 Down Payment BasicsThinking or purchasing your first home??? It???s an exciting time, and requires research.?? Once you know??the amount??of mortgage you qualify for,??you will??determine??the amount of your??down payment.

Consider these down payment options:

  • No Down Payment:?? Some Lenders offer incentives such as??5% cash back at closing. Your??only monetary requirement is to??provide the??closing costs.?? Closing costs??are usually 1.5% to 4%??of the Purchase price.?? This option is always priced higher, meaning the interest rate will be higherthan if a 5% (+)??down payment is made.?? It also requires perfect credit, and the applicant must be employed by an employer.????This option will make your home ownership expensive.?? Take into consideration??the higher rate, and add to that the highest premium paid for mortgage insurance.
  • 5% Down Payment: You must be employed by an employer.?? You must also have good credit, with no slow or late payments on credit within the last 2 years, or derogatory judgements, collections, etc.
  • 10% Down Payment: You can be either self-employed or employed.?? Your credit??must be good, again without any derogatory reporting within the last 2 years.
  • 20% Down Payment:?? This option is ideal.?? In most cases it means you will avoid paying mortgage insurance.?? You can get a mortgage if you have perfect, or less than perfect credit.?? If your credit rating is on the lower side, you will pay a higher interest rate.

The options listed above are for a single family dwelling purchased as your primary residence.?? If you are in bankruptcy during the time you would like to purchase, or are purchasing a multi-unit home, or investment property,??the down payment requirements will be adjusted accordingly.

A down payment can be made using personal savings or investments, gifted from an immediate family member, or borrowed.?? If you are borrowing the down payment from credit card, or line of credit, the Lender will evaluate the application to ensure the ratios are still in line according to their policy, calculating the new payment based on the higher balance of the account being borrowed from.?? You must also show you have access to 1.5% to 4% of the purchase price to cover the closing costs.

Lastly,??a Lender requires proof of down payment sources.????When??using personal funds keep balances untouched for a period of 3 to 6??months.?? That said, if you have transferred funds, or have large deposits??the Lender may still approve, but??will request proof of??source of funds.

It’s ideal to meet with a bank rep or mortgage professional to ensure you are saving, or have access to the correct amount of down payment.?? Research your options and consider the purchase price you will qualify for, and set a plan accordingly.

About the Author

Sandra Grywul, Mortgage Broker, Principal Broker (License: #M08000313) & Owner of Always A Mortgage Corp., Brokerage (License: #11986), Columnist for Condominia Magazine, Blogger for TheRedPin. Sandra???s blog topics for TheRedPin primarily focus on Mortgages, Consumer Debt & Personal Finance.

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