Capital or AKA, Cash.

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I hope you’re enjoying my posts and finding them informative. Please feel free to ask any questions by posting in the comments.

Today we’re going to talk about capital or in other words cash. There has been a bit of confusion about this topic recently because of the changes recently made to mortgage lending rules. With the $0 down payment program disappearing that must mean you HAVE to have a down payment but that’s not necessarily true.

First of all let’s start off with what is the minimum down payment requirement in order to purchase a property. The short answer to that is 5% of the purchase price. However, there are some stipulations as to where that down payment comes from. The main thing a lender looks for here is re-assurances that this money is from your own resources and that they are not borrowed funds. That means most lenders will ask you for 3 months bank statements of the account where the down payment sits to insure that it is in fact your own money. However, there are a few acceptions.

1) Money can be gifted from a parent.
2) Using the cash from a “cash back” mortgage as the down payment.

If the money is gifted, the lender typically asks for the gifter to provide a letter stating that the money is a gift and that re-payment is not required.

If you use the cash from a “cash back” mortgage, keep in mind that the rate of interest charged is substantially higher because the cash is being offered to you in lieu of a rate discount. It’s also impoortant to remember here that if you break the mortgage before its maturity a portion of the “cash back” will have to be paid back usually along with a mortgage penalty which can sometimes be very expensive.

Another source of down payment that can be used for 1st time home buyers is funds from your RRSP. This only applies to 1st time buyers. An individual can use up to $25,000 from their RRSP funds for a down payment and if you’re buying with a boyfriend/girlfriend or spouse, they are also entitled to use the same amount which can bring that some to $50,000. There are some nuances to this program that we can discuss at a later date which canned be used to assist with further funding.

It’s very important to keep in mind here that your credit rating plays a role in the down payment required for your purchase so the amount of 5% is not a hard and fast rule for everyone. Lastly, I want you to keep in mind that you must keep some money aside for closing which usually equates to approximately 1.75% of the purchase price so don’t forget to include that in your calculations.

If you have any questions regarding this topic, please post it in the comments of visit my website http://www.HelpMeBuyRealEstate.ca

Make it a great day.

Walter Monteiro

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