When you prepare to purchase a home in Brampton, Toronto, or the GTA, be aware that a key step in the mortgage process is your downpayment verification. This is where your lender will ask you to provide a 90-day history of all the funds you plan to use for your downpayment. Occasionally, they may even request records that go back further. It’s recommended to be prepared so you don’t face unnecessary stress or delays when you’re ready to close on your new home.
Here’s a typical list of downpayment sources that lenders want to verify. Note that when providing statements, remember to have your name on them. Online statements often don’t include names and other key information.
- Savings and chequing accounts, GICs
- Stocks, mutual funds, and other investments
- RRSPs, FHSAs, and TFSAs. For RRSPs, the money must be in the account for 90 days before you can withdraw under the RRSP Home Buyer’s Plan, or it is taxable.
- Gifted funds from immediate family. A signed gift letter is required that states the funds are a gift and don’t have to be repaid. The giver of the funds may need to provide a bank statement to verify the funds.
- Money from another country. The history of where this money originated from will also be required.
- E-transfers and other deposits to your accounts
- Repayment of loans to you
- Proceeds from the sale of assets
- Proceeds of the sale of your existing home. Provide a firm purchase contract and a current mortgage statement.
- For new construction homes, the lender will require copies of the cheques you provided to the builder, along with the builder’s receipt.
- Using a Home Equity Line of Credit (HELOC) for your down payment may be acceptable. This option is a bit simpler, as lenders simply need confirmation of sufficient room on the HELOC to cover the down payment. Note: the amount borrowed will be included in your debt servicing calculations.
By understanding what lenders need and organizing your financial documents in advance, you’ll be better equipped to handle the downpayment verification.
Why Downpayment Verification Matters: Anti-Money Laundering Compliance
The government takes Anti-Money Laundering (AML) compliance very seriously. Recently, Global News reported that many banking and real estate companies in Canada are not fully adhering to AML laws, according to an internal report by the financial crimes watchdog, FinTRAC. This has led to calls for stricter oversight and higher fines.
Mortgage lenders must maintain a 90-day paper trail for the source of funds used for your down payment and closing costs. Every dollar must be fully documented and accounted for. If a lender is audited and lacks proper documentation for your down payment, they could face severe penalties.
For homebuyers, the downpayment verification process can be rigorous and time-consuming, even if you have a strong financial background and excellent credit history. AML regulations require detailed documentation to ensure all funds are legitimate, adding another layer of complexity to your mortgage approval.
You can avoid delays and stress by preparing your financial documents and ensuring all transactions are transparent and well-documented. These requirements are in place to protect the integrity of the system, so being prepared will help you navigate the process smoothly.
Common Challenges and How to Avoid Them
Lenders require a detailed history of your funds to ensure that all the money for your downpayment is legitimate, traceable, and well-documented. If there are any large deposits in your account—typically $2,000 or more, though the amount can vary depending on the lender, you’ll need to explain these and provide supporting documents. Non-employment-related deposits, such as gifts from family members or proceeds from selling an asset, must be clearly explained.
Several challenges can arise during downpayment verification, and being aware of them in advance can help you prepare:
- Transferring Money Between Accounts: Moving money between multiple accounts to maximize interest or reduce fees might seem like a good idea, but it can complicate things. Each transfer must be documented, and lenders may raise red flags if there are frequent transfers. To avoid this, consider consolidating your funds into one account several months before you plan to buy.
- Multiple Borrowers: If you’re buying a home with someone else, several accounts may be involved, which means more documentation. To simplify this, all parties should aim to consolidate funds into as few accounts as possible.
- Investment Accounts: Investment accounts often don’t send regular statements. If you plan to use money from these accounts, gather your statements well in advance.
Best Practices for a Smooth Downpayment Verification Process
To make the downpayment verification process as stress-free as possible, follow these best practices:
- Consolidate Funds Early: Before you even begin house hunting, consider moving your downpayment funds into one or two accounts. This will make it easier to provide the necessary documentation when the time comes.
- Keep Accounts Simple: Avoid moving money between accounts in the months leading up to your home purchase. The simpler your accounts are, the easier it will be to verify your funds. Multiple transfers and deposits across various accounts can add hours of extra work for the lender. This often results in more questions for you and additional requests for documentation.
- Document Everything: Keep thorough records of where your downpayment money is coming from. This includes bills of sale for assets you’ve sold and other relevant documents.
- Plan for Delays: Understand that the verification process can take time, especially if there are multiple accounts or large deposits to explain. Start early to avoid delays in closing.
A final thought on your downpayment. Don’t exhaust all your funds on the downpayment. You’ll need to show that you have an additional 1.5% of the purchase price available for closing costs, such as legal fees, appraisal fee, land transfer tax, home inspection, title insurance, and moving expenses.
Trust Brampton’s Best Mortgage Broker – Rakhi Madan
Downpayment verification is part of securing your mortgage, but it doesn’t have to be stressful. By consolidating your funds, keeping your financial transactions simple, and thoroughly documenting everything, you can help ensure a smooth and straightforward mortgage approval process. Remember, preparation is key – start organizing your finances well before you begin your home search to avoid any last-minute surprises.
As Brampton’s top mortgage broker, Rakhi Madan is committed to thoroughly educating her clients on every aspect of the mortgage process, including downpayment verification. Her clients consistently praise her for the trust she builds through clear communication and her ability to simplify complex requirements. By outlining exactly what is needed, Rakhi ensures that the documentation process is quicker, stress-free, and fully transparent, allowing her clients to proceed confidently.
