Buying a home is a massive milestone, and whether it’s your first house or your fifth, it’s always a big deal. But let’s be honest, getting that down payment together is probably the most stressful part of the process. It’s not just about having the money; it’s about proving you have the money and that it’s legit.
In Canada, the rules around down payments are pretty specific, and the paperwork can feel overwhelming. But don’t worry! This guide is here to break down everything you need to know—from how long your down payment needs to be in your account to what happens if you’re buying with cash. We’ll even throw in some tips to make sure your journey to homeownership is as smooth as possible.
Why Do Down Payment Matters So Much?
Let’s start with the basics. A down payment is the chunk of money you pay upfront when buying a home. In Canada, it’s typically between 5% and 20% of the home’s purchase price, depending on the mortgage type and the cost of the property.
Now, why is this such a big deal? For one, the down payment reduces the amount you need to borrow, which means lower monthly payments and less interest over the life of your mortgage. But it’s not just about the money; it’s about showing your lender that you’re financially responsible and capable of making this big purchase.
The Importance Of Proof Of Down Payment In Canada
Here’s where things can get a little tricky. It’s not enough to simply have the money for a down payment; you need to prove that you have it. In Canada, this is known as “proof of down payment.” Lenders require this proof to ensure that the money you’re using is legitimate and that it’s truly yours. This is a big deal, especially when it comes to preventing fraud and ensuring that the real estate market remains stable.
The 90-Day History Of Down Payment: Why It Matters
One of the key things your lender will look at is the 90-day history of down payment funds. This means that the money you plan to use for your down payment needs to have been sitting in your account for at least 90 days.
So why 90 days? This period is considered long enough to ensure that the money is yours and that it’s not borrowed from somewhere else. It’s all about stability—lenders want to see that your finances are steady and that you’re not scraping together funds at the last minute.
How Long Does The Down Payment Need to Be in Your Account in Canada?
Let’s dive deeper into the question that’s on everyone’s mind: How long does the down payment need to be in your account in Canada? The answer, as we’ve mentioned, is 90 days.
But what if you’ve just received a large sum of money—maybe a bonus, an inheritance, or a gift from a family member? If this money hasn’t been in your account for 90 days, you’ll need to provide additional documentation to prove where it came from.
Types Of Documents You Can Provide
Depending on where you got your money, documents you can provide include:
- A letter from the person who gave you the money
- A copy of a wilL
- Proof of a bonus from your employer
If I Buy a House With $100,000 Cash, Do I Have to Explain Where the Cash Came From?
Now, let’s address a common scenario: If I buy a house with $100,000 cash, do I have to explain where the cash came from? The short answer is yes, absolutely.
In Canada, large cash transactions are heavily scrutinized to prevent money laundering and other illegal activities. If you’re planning to use a significant amount of cash for your down payment, you’ll need to provide documentation that explains the source of those funds. This could be bank statements, tax returns, or other financial documents that show where the money came from and how long it’s been in your account.
What Happens If You Can’t Prove The Source Of Your Down Payment?
If you’re unable to provide proof of where your down payment funds came from, you could run into some serious roadblocks. Lenders are legally required to verify the source of your down payment, and if they can’t do that, they might refuse to approve your mortgage.
This is why it’s so important to start gathering your documentation early and to be upfront with your lender about where your money is coming from.
| Example If you’re receiving help from a family member, make sure they provide a gift letter that states the money is a gift and not a loan. |
Tips To Make The Down Payment Process Easier
Now that you know the basics, let’s talk about some practical tips to make the down payment process as smooth as possible.
1. Start Early
One of the best things you can do is start gathering your documentation as early as possible. The sooner you have everything in order, the less stressful the process will be. This includes getting your bank statements, gift letters, and any other documents that show where your money is coming from.
2. Keep Your Money In One Place
Once your down payment funds are in your account, try to avoid moving them around. Transferring money between accounts or making large withdrawals can make it harder to prove the source of your funds, and it could raise red flags with your lender.
3. Be Transparent
If you’re receiving help from a family member or using cash for your down payment, be upfront with your lender. Honesty is key here—lenders appreciate transparency, and it will make the process much smoother in the long run.
4. Work With A Mortgage Professional
Navigating the down payment process can be tricky, especially if you’re a first-time homebuyer. A good mortgage broker or advisor can help guide you through the process and make sure you have everything in order. They can also help you understand what lenders are looking for and how to meet those requirements.
What About Other Down Payment Sources?
In addition to savings, there are other sources you might use for your down payment, like the Home Buyers’ Plan (HBP) or a gift from a family member. Let’s explore these options in more detail.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) is a program that allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home. The best part? You won’t be taxed on the withdrawal as long as you repay the amount to your RRSP within 15 years.
If you’re using funds from the HBP for your down payment, you’ll need to show that you’re eligible for the program and that you’re planning to repay the amount within the required time frame. Keep in mind that the money must be in your RRSP for at least 90 days before you can withdraw it under the HBP.
Gifts From Family Members
If a family member is helping you with your down payment, you’ll need to provide a gift letter that states the money is a gift and not a loan. This letter should include the amount of the gift, the relationship between you and the person giving the gift, and a statement that the money does not need to be repaid.
Again, transparency is key. Lenders will want to ensure that the gift is legitimate and that it’s not going to affect your ability to repay your mortgage.
Common Mistakes To Avoid
When it comes to down payments, there are a few common mistakes that can trip up homebuyers. Let’s go over some of these pitfalls so you can avoid them.
1. Not Having a 90-Day History of Funds
As we’ve discussed, your down payment funds need to be in your account for at least 90 days. If you’re planning to use money that hasn’t been in your account for that long, you’ll need to provide additional documentation to prove where it came from.
2. Moving Money Around
Once your down payment funds are in your account, it’s best to leave them there. Moving money between accounts or making large withdrawals can complicate the process and make it harder to prove the source of your funds.
3. Not Being Honest With Your Lender
It’s important to be upfront with your lender about where your down payment funds are coming from. If you’re receiving help from a family member or using cash, let your lender know and provide the necessary documentation. Being honest from the start will make the process smoother and prevent any last-minute surprises.
4. Forgetting About Closing Costs
In addition to your down payment, you’ll also need to budget for closing costs. These can include legal fees, land transfer taxes, and other expenses that can add up quickly. Make sure you have enough money set aside to cover these costs in addition to your down payment.
Conclusion: Getting Your Down Payment Right
Buying a home is one of the biggest financial decisions you’ll ever make, and the down payment is a crucial part of the process. By understanding the requirements and starting early, you can make the process much smoother and less stressful.
Remember, your down payment needs to be in your account for at least 90 days, and you’ll need to provide proof of where the money came from. If you’re using cash or receiving help from a family member, be transparent with your lender and make sure you have all the necessary documentation.
With the right preparation and a little bit of patience, you’ll be well on your way to homeownership.
