The level of documentation which is required for the average mortgage these days can be very frustrating.
It can seem endless and very nit-picky and annoying because we are able to purchase a vehicle with just a pay stub. There are a few reasons for the increased documentation requirements.
The first is that the banks are mandated by the Anti-terrorism Act to make sure all funds are legally sourced.
Criminal organizations do exist even here in Central Alberta and they are clever and will launder their funds however they can.
I had the opportunity to attend an anti-fraud session led by the Edmonton police and he told a story of how a routine bylaw infraction led to the discovery of a criminal enterprise which involved more than $32 million in mortgage fraud. Police resources, insurance proceeds, court time and on and on mean there was a genuine cost to the greater community.
Increased due diligence prior to funding can help catch such things ahead of time.
The second is that your banks and mortgage lenders are accountable to the mortgage default insurers and their company’s investors and shareholders and to OSFI which oversees them all.
If you default on your mortgage they have to be able to prove that they took every step possible to ensure you were in fact a solid borrower qualified for the mortgage.
Honestly it boils down to this. If you were lending someone $350,000, wouldn’t you want to make sure they could afford to repay you?
So back to down payment sources.
When you are providing documentation for your mortgage it is going to have to be pretty clear. It will have to show your name, financial institution holding said asset, account number and all transactions into the account for the past 90 days.
Any deposits over $500 will have to be properly accounted for as per the above rationale. A quick reminder that you will have to have at least 5% to put down and an additional 1.5% for the closing costs so 6.5% all together though these days the banks and the mortgage insurers really like to see additional savings just in case you experience a job loss or illness.
Here are the most common and acceptable down payment sources and how each is to be verified. Keep in mind that you can use a combination of them but you will have to provide verification of each.
1. Savings – all accounts will need to be verified via a 90 day history.
2. TFSA – must be verified via a 90 day history.
3. RSP – will require a 90 day history and in most cases verification that the funds have been redeemed via the forms to the RSP provider and have been deposited into your account.
4. Gift – from an immediate family member. Need to see a signed gift letter stating it is in fact a gift which is not expected to be repaid and proof it has been deposited to your account. In some cases they will want to see the source of the gift which means a statement from the person giving you the funds.
5. Loan – you can use borrowed funds for your down payment through certain lenders. They will need to verify the terms of the loan if it is new to make sure you can afford both it and your mortgage.
6. Credit card/line of credit – this is similar to the loan as above but in this case you usually only have to prove you can afford the payments for both.
7. Sale of asset – you can sell anything you own but make sure you document it properly. Bill of sale, copy of the cheque and proof it has been deposited to your account.
8. Gifted equity – if you are purchasing the home of a family member and they wish to, they can gift you the equity in the home and this can be used as the down payment.
9. Inheritance – this is usually verified via the documents form the lawyer with corresponding deposit to your account.
Sometimes I get questions about rare occurrences such as a lotto win. Even in this case, which I have actually seen, there is a paper trail.
So-called mattress money is no longer acceptable unless you can show you have held it in a traditional account for the 90 days. Banks and mortgage lenders are stuck abiding by the rules which means that so are we all. Until next time, have a great week.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.