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What Are Your Down Payment Options?

What Are Your Down Payment Options?
Are you currently renting? You may not realize there are affordable options available to help you purchase a home and start building equity in your own property, as opposed to paying down your landlord’s mortgage.
Down payment sources are referred to as ‘traditional’ or ‘non-traditional’, and there are many choices available today to help you get into your own home sooner. 
Traditional down payment options
Traditional sources include: savings; investments; RRSPs; a non-repayable gift from an immediate relative; rent-to-own payments above market rent; and proceeds from the sale of another property.
Most buyers use savings or investments as the source of their down payments. Typically, lenders will require three months’ history or statements from your bank to prove the gradual accumulation of assets. 
Next are RRSP withdrawals under the Home Buyers’ Plan. This program enables first-time homebuyers to withdraw up to $25,000 from their RRSPs ($50,000 as a couple) for a down payment. 
This is a tax-free, interest-free loan, where funds must be repaid over 15 years (annual payments of one 15th of the total amount are required). Another stipulation is that the funds must be in the RRSP account for a minimum of 90 days prior to being used.
Gifted down payments round out the top three sources of down payments. Lenders have specific guidelines when it comes to this type of down payment. The gift must come from an immediate family member – parents, grandparents, siblings, etc – and it must purely be given as a gift that’s not expected to be paid back. 
Typically, a gift letter is required to confirm the funds are not part of a loan. Also, confirmation of the funds deposited into the buyer’s account is required. 
Non-traditional down payment options
Non-traditional sources include: borrowed funds such as from a line of credit, credit card, personal loan or family member; and lender cash-back incentives.
This type of down payment is, however, only typically allowed for borrowers with favourable credit and good repayment history. As well, repayment of borrowed funds must be included in the total debt service (TDS) calculation.
Lender cash-back is a significant source of non-traditional down payment. The purpose of this program is to assist buyers using a substantial amount of their saved assets to purchase a home, but who would be left with minimal resources to complete the transaction.
So, while this option is not to be directly used as a down payment, it can free up more funds for the down payment by covering out-of-pocket expenses such as closing costs and lawyer/notary fees.
With a cash-back mortgage, a percentage of your mortgage principal is returned to you in a lump sum when your mortgage closes. The most popular cash-back amount is 5%, but different lenders offer cash-back options ranging from 2% to 7%.
If you break your mortgage before your term is up, you must pay a designated cash-back mortgage penalty in addition to the standard penalty for refinancing early.
It’s also important to note that rates are typically higher than when using traditional down payment options, and the cash-back amount is added to your total mortgage amount and amortized over your term. 
Have questions about your down payment options? Answers are just a phone call or email away!

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