The Source Of Your Downpayment Matters

Tim Lyon • September 26, 2024

If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value.

Anti-money laundering

Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase.

Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member.

To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means.

Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account.

Financial suitability

Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property.

Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely.

The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk.

Downpayment establishes the loan to value (LTV)

Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation.

But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past.

You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV.

All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud.

So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.

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Tim Lyon

Mortgage Consultant

How To Avoid An Accidental Home Purchase

By Tim Lyon • February 20, 2025

Buying a property might actually be easier than you think. So, if you have NO desire AT ALL to qualify for a mortgage, here are some great steps you can take to ensure you don’t accidentally buy a property. Fair warning, this article might get a little cheeky. Quit your job. First things first, ditch that job. One of the best ways to make sure you won’t qualify for a mortgage is to be unemployed. Yep, most mortgage lenders aren’t in the practice of lending money to unemployed people! If you already have a preapproval in place and don’t want to go through with financing, no problems. Unexpectedly quit your job mid-application. Because, even if you’re making a lateral move or taking a better job, any change in employment status can negatively impact your approval. Spend All Your Savings. To get a mortgage, you’ll have to bring some money to the table. In Canada, the minimum downpayment required is 5% of the purchase price. Now, if the goal is not to get a mortgage, spending all your money and having absolutely nothing in your account is a surefire way to ensure you won’t qualify for a mortgage. So, if you’ve been looking for a reason to go out and buy a new vehicle, consider this your permission. Collect as Much Debt as Possible. After quitting your job and spending all your savings, you should definitely go out and incur as much debt as possible! The higher the payments, the better. You see, one of the main qualifiers on a mortgage is called your debt-service ratio. This takes into count the amount of money you make compared to the amount of money you owe. So the more debt you have, the less money you’ll have leftover to finance a home. Stop Making Your Debt Payments So let’s say you can’t shake your job, you still have a good amount of money in the bank, and you’ve run out of ways to spend money you don’t have. Don’t panic; you can still absolutely wreck your chances of qualifying for a mortgage! Just don’t pay any of your bills on time or stop making your payments altogether. Why would any lender want to lend you money when you have a track record of not paying back any of the money you’ve already borrowed? Provide Ugly Supporting Documentation. Now, if all else fails, the last chance you have to scuttle your chances of getting a mortgage is to provide the lender with really ugly documents. To support your mortgage application, lenders must complete their due diligence. Here are three ways to make sure the lender won’t be able to verify anything. Firstly, and probably the most straightforward, make sure your name doesn’t appear anywhere on any of your statements. This way, the lender can’t be sure the documents are actually yours or not. Secondly, when providing bank statements to prove downpayment funds, make sure there are multiple cash deposits over $1000 without explaining where the money came from. This will look like money laundering and will throw up all kinds of red flags. And lastly, consider blacking out all your “personal information.” Just use a black Sharpie and make your paperwork look like classified FBI documents. Follow-Through So there you have it, to avoid an accidental home purchase, you should quit your job, spend all your money, borrow as much money as possible, stop making your payments, and make sure the lender can’t prove anything! This will ensure no one will lend you money to buy a property! Now, on the off chance that you’d actually like to qualify for a mortgage, you’ve come to the right place. The suggestion would be to actually keep your job, save for a downpayment, limit the amount of debt you carry, make your payments on time, and provide clear documentation to support your mortgage application! If you'd like to make sure you're on the right track, connect anytime. It would be a pleasure to walk through the mortgage process with you.

Standard or Collateral Charge Mortgage. What’s best for you?

By Tim Lyon • February 13, 2025

When arranging mortgage financing, your mortgage lender will register your mortgage in one of two ways. Either with a standard charge mortgage or a collateral charge mortgage. Let’s look at the differences between the two. Standard charge mortgage This is your good old-fashioned mortgage. A standard charge mortgage is the mortgage you most likely think about when you consider mortgage financing. Here, the amount you borrow from the lender is the amount that is registered against the title to protect the lender if you default on your mortgage. When your mortgage term is up, you can either renew your existing mortgage or, if it makes more financial sense, you can switch your mortgage to another lender. As long as you aren’t changing any of the fine print, the new lender will usually cover the cost of the switch. A standard charge mortgage has set terms and is non-advanceable. This means that if you need to borrow more money, you'll need to reapply and requalify for a new mortgage. So there will be costs associated with breaking your existing mortgage and costs to register a new one. Collateral charge mortgage A collateral charge mortgage is a mortgage that can have multiple parts, usually with a re-advanceable component. It can include many different financing options like a personal loan or line of credit. Your mortgage is registered against the title in a way that should you need to borrow more money down the line; you can do so fairly easily. A home equity line of credit is a good example of a collateral charge mortgage. Unlike a standard charge mortgage, here, your lender will register a higher amount than what you actually borrow. This could be for the property's full value, or some lenders will go up to 125% of your property's value. In the future, if the value of your property appreciates, with a collateral charge mortgage, you don't have to rewrite your existing mortgage to borrow more money (assuming you qualify). This will save you from any costs associated with breaking your existing mortgage and registering a new one. However, if you’re looking to switch your mortgage to another lender at the end of your term, you might be forced to discharge your mortgage and incur legal fees. Also, by registering your mortgage with a collateral charge, you potentially limit your ability to secure a second mortgage. So what’s a better option for you? Well, there are benefits and drawbacks to both. Finding the best option for you really depends on your financial situation and what you believe gives you the most flexibility. This is probably a question better handled in a conversation rather than in an article. With that said, undoubtedly, the best option is to work with an independent mortgage professional. It’s our job to understand the intricacies of mortgage financing, listen to and assess your needs, and recommend the best mortgage to meet your needs. As we work with many lenders, we can provide you with options. Don’t get stuck dealing with a single institution that may only offer you a collateral charge mortgage when what you need is a standard charge mortgage. So if you’d like to have a conversation about mortgage financing, please get in touch. It would be a pleasure to work with you and answer any questions you might have.