Week 4: Where to Find Money

Week 4: Where to Find Money for Your Down Payment

Buying a Home 101 Series – Week 4

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to Closing day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Coming up with a lump sum of money for a down payment can be scary and daunting to many first-time buyers. You definitely don’t want to wipe out your entire savings to purchase a home.

It doesn’t have to be a roadblock to homeownership!

Once you’ve got your monthly budget all set and know approximately how much home you can really afford (see Do the Math – A Mortgage You Can Afford [link to last week’s article] article in the series), the next step is dealing with your down payment. 

Here’s some guidance on where you can find cash for your down payment and also a rundown of some great homebuyer assistance programs that can help reduce the amount taken out of your own pocket.

How Much Down?

How much money you need for a down payment can depend on the type of mortgage you will get for your financing.

• Lenders of conventional loans require 20% down or more. You will not require mandatory mortgage insurance, but your interest rate will be higher.
• A high ratio loan can be a minimum of 5% down up to a maximum of 19%. This will require mandatory mortgage insurance.
• Depending on your income or credit, you MAY be able to borrow the down payment for an additional cost (at a higher interest rate).

However, the amount you put down really depends on YOU.  If you’re a first-time buyer, don’t put all of your savings into your house. You may need some of that cash once you’re a homeowner. 

Instead, put down just enough to buy the house and get a monthly payment that works for your budget right now.

Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much you’ll actually need for your down payment. Next week you’ll learn more about mortgage options out there so stay tuned for that!

Here’s a rundown of where to find money for your down payment:

Government Homebuyer Assistance Programs

Introduced in 2022, the Tax-Free First Home Savings Account (FHSA) is a registered plan that gives first time Buyers the ability to save up to $40,000. Like an RRSP, the contributions are tax-deductible , and like a TFSA, there no tax on withdrawal if you use the money to buy a home! It’s an excellent program I wish more new Buyers would take advantage of. Read here (LINK) for more information.

Another program, the Home Buyer’s Plan (HBP) allows you to make a withdrawal from your retirement savings plan (RRSPs) to buy. Here you can withdraw up to $60,000, and the program allows you to pay it back within a 15-year period. Read here (LINK) for more information.

Reach Out to Friends and Family

You might be reluctant to ask your family, but they can be a great source for your down payment. You will need to decide if this is a gift or a loan. Your parents might have done the same thing when they bought their first house!

• Gift from Family. Immediate family will often help with home purchases. Documentation is required so you need a letter stating that the money is indeed a gift with no expectation of repayment.
• Borrow from Family or Friends. You may prefer to ask for a loan rather than a gift from a loved one. However, your lender needs to know if you are borrowing from family or friends since they will consider this an additional debt for you. The lender will factor this additional debt into its own decision on whether to loan you money.

Boost Your Savings

This is one area where you have some control over and should start making an effort as soon as you even begin thinking about buying a home. The earlier you start, the more you can increase your personal savings.

• Tax Refund. Consider changing your withholding exemptions from 1 to zero. Your paycheck will be reduced but you’ll get a bigger check at tax time to use toward your down payment. That way you won’t use the money up during the year and will have a big chunk at the end.
• Deposit $$ in Bank Regularly. You’ve probably heard this before, but it does work: Get into the habit of putting the same amount of money into your savings after every paycheck. If you get paid every two weeks and save $200 from every paycheck, you will have saved more than $5,200 after 12 months. Not bad!
• Sell Stuff on Facebook Marketplace, etc. Everyone has unwanted items that take up space. Consider selling these items and put that money toward your down payment.

Do you still need to make sense of all the mortgage options out there? It’s definitely not “one-size-fits-all” these days! Let’s discuss your specific financial situation and what’s possible for you.  This is the part that stops most buyers who can afford a home, simply because they don’t have all the information they need to make the right decision. 

If thinking you don’t have enough to put down is stopping you, email me (link to my email) and let’s schedule a time to talk more and see!  I can help give you an honest assessment of whether you can move forward or if you it would be best to wait a few months or years. 

Next week’s article goes over all the details in the Five Steps to Obtaining a Mortgage.  If I don’t hear from you before then, enjoy your week and stay tuned to next week’s article for even more information about how to get the best loan for YOU!