The focus of this week's article, proving the down
payment, has been a bone of contention for years, and it's getting worse.
Under the Canadian system, Banks, Trust Companies, and mortgage companies
cannot lend greater than 75% financing unless the loan is insured against
default. This is called "high ratio" financing. The lender applies for
this default insurance. The applicants, because most don't have 25%
down, will be asked to pay for this insurance through a premium that is
normally added to the loan amount. The higher the loan-to-value ratio,
the higher the premium percentage. The lesser the down payment, the
higher the scrutiny will be on proving you have the cash for the down payment.
I have had several cases lately of minimum down payment CMHC insured
loans that have gone astray because neither the applicants, nor the lending
officers knew the rules for proving down payment. Let me be perfectly
candid from the onset that the mortgage system over the years has been
violated by methods of proving fictitious down payment. As a result
of this 100% financing, the system has gotten a lot more suspicious when
it comes to providing evidence that there really is a down payment.
The reason the system insists on a down payment comes from analysing loan
losses over the years. It has become apparent that if the Consumer
puts little or no money down, he/she has little to lose by walking away
from a property, if the going gets a little tenuous.
The system will legally allow 95% financing for anybody to buy a home
(residence), so the proving of the 5% down payment differential will be
crucial to the application for a mortgage.
A few years ago, you could say that you would save the down payment
between the offer date and the occupancy date. Today, you must show
you have the cash before you ask the lender to represent you to Canada
Mortgage & Housing Corp. (CMHC) to get the necessary default insurance.
Recently I had a Client who could save $1000/month, while living with his
in-laws. They put in a bid to buy a home in 6 months time, but at
the time of application for the mortgage, they had virtually no money.
The application for mortgage was denied.
In years gone by, a gift giver relative would simply say he/she would
provide a gift of cash when needed to close the transaction. Today,
the gift must be proven as being received from the relative to the proposed
purchaser before the purchaser applies for the default insurance through
his/her lender. Another Client was receiving money from India as
a gift from his father. The funds had not arrived as yet, although
they were in possession of a gift telegram. The application for mortgage
financing was denied. For those of you who desire to rent-to-own
(RTO), the situation can be difficult. The proposed Vendor of the
property may say to you that he/she is willing to rebate a certain portion
of the rent for you to apply towards your down payment. It really
does not matter what the Vendor is willing to do, the system dictates the
rules. First and foremost, you must be paying "market rent" for that
particular property, then over and above the rent, you may pay extra to
the Landlord "in trust" to save on your behalf for the down payment. As
in a recent example, a tenant was told that out of his monthly rental
payment of $850, the Landlord would rebate 50% of the rental towards the
eventual purchase of a $90,000 townhouse. The tenant rented for one
year then applied to purchase the property with a down payment of $5100
(that's half the rental [$425] times twelve months). The system says
you can have as little as 5% down, so the offer should have gone through,
but it was shown on the offer that the Landlord was contributing 50% of
the rental towards the down payment. The application was denied by
CMHC because the Vendor contributed towards the down payment. It
was established that the market rental was $800 per month on the unit so
the down payment could only be the difference between the rental and the
market value (ie. $50 per month or $600 total over the year). Since
the $600 was not enough down payment, the application was denied.
We were able to save all three deals, but if the system had been followed
from the beginning, or if the knowledge had been present, a lot of heartache
would have been avoided. If you cannot prove your down payment has
been in your bank account for at least the last 90 days, you may run into
qualifying problems. If you have questions about your own case, you
may contact me through my website or though the Sun.