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(May 5, 2022)

The final segment of a multi-post series, Turning a Decline into an Approval, here is Decline Reason #4 – Down Payment Issues:

Decline Reason #1: Not enough income

Click Here to expand on Decline Reason #1

Decline Reason #2: Ineligible Qualifying Income

Click Here to expand on Decline Reason #2

Decline Reason #3: Credit Issues

Click Here to expand on Decline Reason #3

Decline Reason #4: Down Payment Issues

The down payment for a mortgage is often the most overlooked condition of the entire mortgage closing process, and at times the most misunderstood. For instance, many people are aware that the minimum entry level down payment requirement to purchase a property in Canada is 5%. But what many fail to recognize is that the source of the down payment is often more critical than the actual amount itself. By the time you’ve completed the application with your mortgage broker, you will undoubtedly be aware of your minimum down payment requirement and will likely be quick to assure your mortgage provider that you are “good for it”. But what so many neglect to do is close out the process of verifying the down payment proceeds from the onset of the qualification process – many will leave it for later. By far, the biggest down payment deal-killer is when the lender and mortgage broker discover (later on, usually at the 11th hour when it’s too late for Plan B!) that all, or a portion of your down payment proceeds are from borrowed sources (personal line of credit, personal loan, credit card advance, etc). AND THEN…discovering that proceeds from borrowed sources are NOT eligible for down payment. So now, you must either re-qualify and re-approve your entire mortgage…and add to that, the extra heightened qualification criteria associated with the borrowed-down-payment-mortgage (less purchasing power than standard mortgage qualification). The risk of not being able to re-qualify is REAL.

One way around this – provide all of your down payment verification documents to your mortgage broker up-front, even if your mortgage broker does not request it (…shame on them if they don’t!).

Here are some work-arounds if you encounter a situation of not knowing, then being told at the 11th hour that the money you have put aside for your down payment is not eligible:

call mom and dad and beg for either of the following: (i) A cash deposit of the down payment funds that are in dispute. You and your parents (or immediate family member) would have to mutually sign a Gift Letter document that declares the funds are a “gift” and that there are no conditions to pay it back. Confirmation that the funds have been deposited in your bank account will also be required. (ii) Add parents to the mortgage application as a co-signer (provided they are ideal co-signer candidates)
re-qualify under the Borrowed Down Payment Mortgage Program. Not as easy as it sounds though. The key differentiator is that the portion of your down payment that is borrowed must be accounted for in the overall debt servicing ratios of your qualification. If you were already at the upper level of your current mortgage qualification, this additional debt servicing liability will surely keep you off tilt.

So in summary, the key to avoiding unexpected down payment issues is to approach the lender’s requirement for it with a sense of urgency. This basically holds true for the entire mortgage approval process; provide everything the lender asks for, immediately, or as soon as possible. Identifying challenges or shortcomings early on in the process will not necessarily eliminate the concern, but will definitely enhance your chances to rectify the issue or leave you with enough time to seek other deal-saving counter measures.

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