Good day class! Nice to see you all in your places with bright shiny faces! Last week we took a look at the fascinating and slightly macabre origins of the word “mortgage”.
Today we’ll take a look at the term “downpayment” – what it means and why you need one.
In terms of home-buying, the downpayment is essentially your contribution to the purchasing of the property. The rest of the funds come in the form of the mortgage loan from a lender, whether it be the bank or your rich uncle – unless of course you are in the very enviable position of being able to purchase a home with out a loan.
A down payment not only gives you a bit of ownership of the property from the get-go, it also gives the lender a measure of comfort that you too, are invested in the property and have something to lose by not making good on your mortgage paying commitments. That’s because if you don’t make your agreed mortgage payments, the lender may have to foreclose on the property and take it from you in lieu of the money that is owed. In that case, along with your property, you would lose your cash investment.
In Canada, it is still possible to obtain “‘zero down” mortgages of sorts but an applicant must be stellar in all aspects of their application to be seen as a worthwhile risk for this very risky mortgage.
Calculating A Downpayment
At the time of writing, if you qualify, the minimum downpayment to purchase a home is 5% of the purchase price. You could, however, be required to put down more should the lender see you or the property you are buying as a risk in some way.
So, in mathematical terms, if you were purchasing a home that is costing you $250,000, the equation would look like this:
$250,000 (Purchase Price) x .05 (.05 is the equivalents of 5%) = $12,500 (Downpayment)
When Do I Have To Provide My Downpayment Funds?
Let’s say you did go ahead and purchase this particular home for $250,000. To make the offer to your seller, you will have to put a certain amount of money on deposit with your Realtor to show that you are a serious buyer, Let’s say the initial deposit is $5000. That deposit amount is taken out of the total amount of downpayment that you must provide so in this case, you still need to come up with $7500 ( $12,500 – $7,500).
If you are building a brand new home, you will most likely have to provide ALL of the $12,500 upon acceptance of your offer and approval of your mortgage. In fact a builder may even require you to put down as much as 10% of the purchase price so be sure to check with each lender before you fall in love with a showhome.
If you are purchasing a pre-owned home, you will need to prove that you have the downpayment funds in your bank account ( via 90 days of bank statements) during the mortgage approval process but you won’t need to actually provide them to your lawyer until approximately a week before possession of your property.
Obtaining a Downpayment
Lenders have a few rules when it comes to downpayements to guard against fraud and to protect borrowers from not being able to pay their mortgage due to a debt related to obtaining a downpayement.
Check out this previous post for more information about where a downpayment is allowed to originate from.
Need more clarification? Contact First Foundation to be tutored privately by an experience, licensed mortgage broker.