Real Estate

Borrowing money for down payment

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  • Mar 22nd, 2018 6:30 am
[OP]
Member
Jan 5, 2018
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Borrowing money for down payment

I've got a few questions, all related to borrowing money for down payment.

1) From speaking to a few brokers, it sounds like many lenders have issues with borrowed money for down payment. What is wrong with this? Why can't I simply qualify for a lower mortgage taking the borrowed down payment into consideration along with my other liabilities?

2) Say I have a LOC with debt balance. Brokers/lenders will ask if I have savings. I don't understand this. No, I don't have "savings" because any money I had, I would've just put into the LOC. I can always take it out again if I need, but I wouldn't leave large sums of money just hanging out in my savings account when I can just put it back into the LOC. So how do you really differentiate "my savings" vs borrowed money?

3) To answer my own question 2, I've been told that the money has to be in your account for >90 days to be considered yours. So essentially I can transfer money from my LOC into my account, leave it for 90 days, and now that becomes my savings?

4) I know getting a "gift" from a family is allowed, as long as they declare it is truly a gift with no obligation of repayment. Is a family member allowed to "gift" you with borrowed money?
31 replies
Jr. Member
Mar 2, 2016
180 posts
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Lenders have been tightening lately. Yes you could take money from LOC and let it sit there for 90 days but when you apply for the mortgage and they pull credit report you will have that balance, which will take away from what you can borrow. And lenders may see it as a risk if it is an unsecured LOC. Lenders want to see savings cause its an actual asset where as LOC is not, which is why most lenders wont give you the mortgage if thats the case. Other factors will come into play as well, like income and credit score. I believe gifting from immediate family is allowed but they may need to sign a form saying that they are gifting it to you and not lending it to you. Some lenders might want to know the source of those funds as well, so they may ask for bank statements of the person gifting you money. Its not like there is anything wrong with using borrowed funds as a down payment, it will just bring the chances of you approving for a mortgage alot lower.
[OP]
Member
Jan 5, 2018
207 posts
105 upvotes
Raptorfan6 wrote: Lenders have been tightening lately. Yes you could take money from LOC and let it sit there for 90 days but when you apply for the mortgage and they pull credit report you will have that balance, which will take away from what you can borrow. And lenders may see it as a risk if it is an unsecured LOC. Lenders want to see savings cause its an actual asset where as LOC is not, which is why most lenders wont give you the mortgage if thats the case. Other factors will come into play as well, like income and credit score. I believe gifting from immediate family is allowed but they may need to sign a form saying that they are gifting it to you and not lending it to you. Some lenders might want to know the source of those funds as well, so they may ask for bank statements of the person gifting you money. Its not like there is anything wrong with using borrowed funds as a down payment, it will just bring the chances of you approving for a mortgage alot lower.
Sure, they will see the LOC balance on the credit report and that will take away from what you can borrow. But that still beats not even considering giving you a mortgage if you say you're borrowing from LOC for the down payment, as I have been told by a broker.
Member
Dec 28, 2017
336 posts
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Burlington
Fred is right, it's really based on your Debt Servicing Ratio, if you take out a LOC for the downpayment, then they will treat the monthly payment as part of your cash outflow / debt obligation.

i.e. if you have income of $10k a month and your LOC cost you $500 a month and mortgage will cost $2000 a month.. that's only 25% DSR which shouldn't be an issue with many banks

however, if you make $5k a month with the same LOC and mortgage, banks might have an issue while it's only 50% of your income.. once you factor in tax and utilities.


just remember.. buying a house/home is going to be one of your biggest investment in your life... think carefully and calculate everything before you act.
Deal Addict
Jan 15, 2017
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1. Lenders like to see some equity in the home as it reduces risk. As a homeowner, you are more apt to continue paying on the mortgage when you have more equity in the home. Using borrowed funds for the down payment and borrowed funds for the mortgage equates to 100% financing. If mortgage default insurance is required, then your financing will exceed 100%.

2. You need a better understanding between assets and liabilities. Credit available in a LOC is not "savings". Your inability to save money combines with your overspending (as evident by the balance owing on the LOC) is a red flag for home ownership where unexpected expenses can easily occur.

3. You can borrow against your LOC for your down payment. But the lender will want to know why you have to do this? Is there something going on with you that is not necessarily showing up on the mortgage application? The lender will look at your income, your assets, liabilities, and work history and will determine a financial snapshot and then ask the question of whether or not this snapshot makes sense. Red flags on mortgage applications often arise by what's missing on the application.

4. No, a family cannot gift you a borrowed down pmt. A borrowed DP must be repaid and it will be added to your list of liabilities.
[OP]
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Jan 5, 2018
207 posts
105 upvotes
skeet50 wrote: 2. You need a better understanding between assets and liabilities. Credit available in a LOC is not "savings". Your inability to save money combines with your overspending (as evident by the balance owing on the LOC) is a red flag for home ownership where unexpected expenses can easily occur.
I'm not saying LOC is considered savings. I'm saying there would be no reason for one to keep money in a savings account when the LOC interest rate is higher.

Say you owe $100k on the LOC, and you saved $50k from your income this year. Instead of having that $100k LOC and $50 in savings, you would simply put the $50k back in the LOC and make it just $50k LOC and $0 savings.
Jr. Member
Mar 2, 2016
180 posts
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fred125 wrote: I'm not saying LOC is considered savings. I'm saying there would be no reason for one to keep money in a savings account when the LOC interest rate is higher.

Say you owe $100k on the LOC, and you saved $50k from your income this year. Instead of having that $100k LOC and $50 in savings, you would simply put the $50k back in the LOC and make it just $50k LOC and $0 savings.
If this were the scenario, you would have 50k in unsecured debt, on top of that you will use LOC as DP. Not putting any of your pwn savings will make it really tough on the application to get an approval. Not saying its impossible but chances are pretty low.
Deal Addict
Apr 21, 2014
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Alberta
Because it’s viewed as using borrowed money as collateral for borrowed money. Too risky.
Member
Mar 6, 2017
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fred125 wrote: I'm not saying LOC is considered savings. I'm saying there would be no reason for one to keep money in a savings account when the LOC interest rate is higher.

Say you owe $100k on the LOC, and you saved $50k from your income this year. Instead of having that $100k LOC and $50 in savings, you would simply put the $50k back in the LOC and make it just $50k LOC and $0 savings.
you are right. That would be correct in terms of your own personal finances but for the bank it won't matter.

if you apply with 50k down and a 100k loan or zero down with a 50k loan you'll most likely get rejected.

you could buy a preconstruction condo and use an loc to pay the down payments required from the builder but when the building or house is being registered that needs to paid off completely and your back in the same position again.

my parents had a tough time with getting a mortgage with 55% down... the payments were a joke it could've been double and they could pay it off without issue. They have their own business so that was one of the reasons but the banks are really tough the past couple years on giving out mortgages.
Deal Guru
Feb 22, 2011
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Toronto
I don't know about other banks but Scotia does not check the source of the gifted amount
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Jan 27, 2004
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rjg4235 wrote: I don't know about other banks but Scotia does not check the source of the gifted amount
They check if they suspect something fishy. Behind the scenes their underwriting/credit department looks out for these patterns.
The broker/lender in front of you might not. But if stuff starts not making sense, it shows up...
I just re-call b/c before when I did mortgages the audit would pick on every little thing. I'm sure it was to ensure all the T's and eyes are completed. or crossed. or dotted. You know that saying...

PLus you have to have that gift letter if source of downpayment is gift.
[OP]
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Jan 5, 2018
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rjg4235 wrote: I don't know about other banks but Scotia does not check the source of the gifted amount
UrbanPoet wrote: They check if they suspect something fishy. Behind the scenes their underwriting/credit department looks out for these patterns.
The broker/lender in front of you might not. But if stuff starts not making sense, it shows up...
I just re-call b/c before when I did mortgages the audit would pick on every little thing. I'm sure it was to ensure all the T's and eyes are completed. or crossed. or dotted. You know that saying...

PLus you have to have that gift letter if source of downpayment is gift.
You guys are talking about situations where the family member borrowed money to gift?
Deal Guru
Feb 22, 2011
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Toronto
fred125 wrote: You guys are talking about situations where the family member borrowed money to gift?
Yes if your family member borrowed money to gift to you it would work. Scotia does not ask the family member how they attained they money. They also don't care because you aren't liable to pay back a gift and they have that equity on the asset you are using against a loan with them. So should you default they can take the house and equity to use as payment for the debt to them. Your family member would not be able to claim it as their money.
[OP]
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Jan 5, 2018
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rjg4235 wrote: Yes if your family member borrowed money to gift to you it would work. Scotia does not ask the family member how they attained they money. They also don't care because you aren't liable to pay back a gift and they have that equity on the asset you are using against a loan with them. So should you default they can take the house and equity to use as payment for the debt to them. Your family member would not be able to claim it as their money.
But you're implying that should a bank ask, this would be a problem?
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Jan 15, 2017
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fred125 wrote: I'm not saying LOC is considered savings. I'm saying there would be no reason for one to keep money in a savings account when the LOC interest rate is higher.

Say you owe $100k on the LOC, and you saved $50k from your income this year. Instead of having that $100k LOC and $50 in savings, you would simply put the $50k back in the LOC and make it just $50k LOC and $0 savings.
Yet, you've just discovered that there is a reason to keep $50K in a savings account - and that is when you want to buy a house. When you have the $50k in savings, your down payment is from your own sources. When you borrow $50K from a LOC, your down payment is considered borrowed funds and from a non traditional source.

From a credit granting perspective, there is a significant difference between having $50k cash in a bank account and having access to a credit line for $50K.
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Nov 2, 2013
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1) From speaking to a few brokers, it sounds like many lenders have issues with borrowed money for down payment. What is wrong with this? Why can't I simply qualify for a lower mortgage taking the borrowed down payment into consideration along with my other liabilities?
Depends on how much you're paying monthly to service the debt. If the monthly payment for the debt still squeezes into your debt servicing ratio along with your mortgage, then you should be fine. Often, this is not the case, since typically a very large amount has to be borrowed.

Credit cards are the worst since it's usually 3% of your balance - so if you borrow $10,000- even if it's the 0% MBNA deal where you only pay the 1% fee once and then no interest- it's still treated as a standard $300/mo. debt. That's about a $53,000 loss in mortgage room under the current rules. So loosely, expect to lose $5,300 mortgage room per $1,000 of CC you borrow.

I've never had a line of credit so I can't speak for their monthly payments, but if it's like a car loan (secured) where it's amortized over a few years, then you could probably borrow the entire downpayment and pay a few hundred per month. Though then you'd just rather sell the instrument you're securing the loan to (usually a vehicle). Unsecured line of credits are much harder to get and usually come in high interest, low amounts. The high interest will push your payments high.

Here's an example: suppose your income is $72,000. With the 40% total debt to income ratio allowance, you're allowed $2,400/mo. to service your total debts, condo fees, property taxes, and utilities. Some lenders only use half of the condo fees, property taxes, and utilities against you.

With $200/mo. condo fees and $200/mo. property tax, you'll just barely get into a $370,000 home with 5% down, if only half of the condo fees are used against you. In this scenario you have to have 0 other debt to close - unless you do what I mention below @ #3 to produce a paid off loan statement to the lender.

Now suppose you make $82,000/year instead. Now you have $400/mo. more debt room. So if you're short $10,000 of the 5% down + 1.5% closing cost requirement, then you can still owe money somewhere that costs you <=$400/mo. to service.
2) Say I have a LOC with debt balance. Brokers/lenders will ask if I have savings. I don't understand this. No, I don't have "savings" because any money I had, I would've just put into the LOC. I can always take it out again if I need, but I wouldn't leave large sums of money just hanging out in my savings account when I can just put it back into the LOC. So how do you really differentiate "my savings" vs borrowed money?
Lenders usually ask for past 90 days of bank statements relating to the balance they're inquiring about. They typically want to see min. downpayment amount (usually 5%+) plus 1.5% for closing costs, such as legal fees, land transfer tax, insurance, registration, etc. That's what they typically are looking for - this total of 6.5%+ of the home purchase price, in cash - along with the associated bank account's 90 day history to see where you got it from. If it's from irregular increments, then they'll start questioning - and this is where many people have to produce a gift letter.
3) To answer my own question 2, I've been told that the money has to be in your account for >90 days to be considered yours. So essentially I can transfer money from my LOC into my account, leave it for 90 days, and now that becomes my savings?
It does not have to be there for 90 days - they just want to see the 90 day history of how it's grown to that number. Your idea works if your LOC's monthly payment along with your proposed mortgage payment, utilities, condo fees, property taxes, etc. all squeeze into your debt servicing ratio. If it does not, then you make a condition that the LOC is paid off first before getting the mortgage. So take that cash, pay it off, and then show the lender the statement of the cleared loan. Afterwards when you actually take the bank draft to the lawyer, take it out from the LOC.
4) I know getting a "gift" from a family is allowed, as long as they declare it is truly a gift with no obligation of repayment. Is a family member allowed to "gift" you with borrowed money?
What your family member does to get you the money is his/her business, not yours - the lender is just concerned on how YOU got the money. Though it is in your best interest to not tell the lender that.
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Another way around this would be to buy a pre-contruction condo/house which usually requires a (15-20%) payment over the period the unit is being built. If you don't have enough savings, use a LoC to pay for some of payments. If you can pay off the LoC before you take out a mortgage, you should be okay. The mortgage is only required upon closing (after the unit is built).
[OP]
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FirstGear wrote: Lenders usually ask for past 90 days of bank statements relating to the balance they're inquiring about. They typically want to see min. downpayment amount (usually 5%+) plus 1.5% for closing costs, such as legal fees, land transfer tax, insurance, registration, etc. That's what they typically are looking for - this total of 6.5%+ of the home purchase price, in cash - along with the associated bank account's 90 day history to see where you got it from. If it's from irregular increments, then they'll start questioning - and this is where many people have to produce a gift letter.

It does not have to be there for 90 days - they just want to see the 90 day history of how it's grown to that number. Your idea works if your LOC's monthly payment along with your proposed mortgage payment, utilities, condo fees, property taxes, etc. all squeeze into your debt servicing ratio. If it does not, then you make a condition that the LOC is paid off first before getting the mortgage. So take that cash, pay it off, and then show the lender the statement of the cleared loan. Afterwards when you actually take the bank draft to the lawyer, take it out from the LOC.
Thanks for the detailed response.

Just to clarify: Are you saying they want to see 90 days of bank statement leading up to application date or 90 days leading up to when you accumulated the entire down payment? For example, say I'm applying for mortgage on Sep 1, but have had the entire down payment in my account since May 1. Do they want to see June-Sep statements or Feb-May statements?
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fred125 wrote: Thanks for the detailed response.

Just to clarify: Are you saying they want to see 90 days of bank statement leading up to application date or 90 days leading up to when you accumulated the entire down payment? For example, say I'm applying for mortgage on Sep 1, but have had the entire down payment in my account since May 1. Do they want to see June-Sep statements or Feb-May statements?
Whenever you apply for the mortgage typically. In that example, they'd ask for June - Sep
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Why would anyone in their right mind borrow money to lend to someone for their house down payment? Seems incredibly foolish to me to provide someone a gift letter for money that they've borrowed to give them. Weird.

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