Expert: Cinzia Dalgarno - 3/5/2010

Question
Hello Cinzia,  

I would like to make an offer on a home that is at the maximum of my price range so money is very tight.  I had 36000 previously saved for my down payment and closing but was advised to pay off  a 15000 line of credit so that when I made my offer it would seem like I would have less dept, even though I would eventually need those funds in order to close the deal.  Was this good advise, and what closing costs are we required to show we have at the time of the offer.  I had though just as long as you had the down  payment then you did not have to show you had the closing fees right away, as I was planning on saving for those fees during the three months before the closing date that was requested on the feature sheet. I heard that there was some way to delay the payment of the land transfer taxes (being in Toronto it is quite hefty) for 180 days post closing for a fee) would this affect the approval of the offer in a negative way.  Sorry for so many questions, I am just totally confused.

unsure and homeless

Answer
Part 2:
Hello again. I wanted to clarify that not knowing your exact details, my advice may not apply. Your broker might have a reason for telling you to pay down your line of credit - not having seen your credit bureau, it's difficult to say. For example, it's a little known fact that having the balances on your credit cards and lines of credit at any more than 75% of the limit can seriously affect your credit score. ie: Visa, limit $2000, balance should never go above $1500. If your purchase is not going to be for more than 3 months from now, your dilemma is easily remedied...take the money back out of your line of credit, put it into your savings account, and in 4 months you will be able to provide 3 months statements proving you had the downpayment in your account.
No, it's not cheating. You will also have to be able to debt service with that amount owing on your line of credit. If you do NOT debt service with that balance owing on your line of credit, you may need to look at another strategy; there are lots of ways to make a deal work. Find the right broker - they'll help you through it.

Part 1:
Hello Le. I'd like to suggest that you find a reputable mortgage broker and have them get you a pre-approval; that will tell you not only whether you have enough money, for certain, but also what conditions the lender has for you to fulfill. That way you will know exactly what is required, and can work your way through the conditions. When you do find the house of your dreams within your means, you can then hand over a complete package of documentation to your broker.

One typical condition is the requirement for downpayment confirmation, non-borrowed, via 3 months bank statements, term deposits, rrsp's, etc.

What this means is that you must prove that you have the requisite downpayment amount in an account in your name, and it must have been in that account for a minimum of 3 months. This gives the lender comfort that you have not borrowed the money; if you did borrow the money, assumably after 3 months the debt would show up on the credit bureau, and it would be included in your debt servicing.
It is possible to get a mortgage with little or no downpayment, as well as with borrowed downpayment. However, various conditions apply to those scenarios, all of which a mortgage broker will be happy to go over with you. You would want to avoid going for the "5% cashback" options commonly offered - that is, the 5% cashback from the lender becomes in effect, your downpayment - as these are offered at very high rates. It would be cheaper to borrow the 5% downpayment, and go for the "borrowed downpayment" option - you would be accorded regular discounted rates, and simply pay interest on the borrowed dp, rather than pay a higher rate on the entire mortgage amount.

The industry standard for closing costs is 1.5% of the purchase price - if your mortgage is insured, it is a requirement that you prove you have this amount above and beyond your downpayment - and yes, it also needs to be "non-borrowed".

I am unsure about the delaying of the land transfer taxes; I have always been under the impression that these form part of the statement of adjustments, and are taken care of along with everything else, at time of funding. However, your lawyer will be the best person to confirm that.

Hope this was helpful to you, and please, do consider using a mortgage broker. We don't bite, and if you are going to purchase a house in Canada, it's in your best interest to have someone knowledgeable in mortgages, review your situation.

Warm regards,
Cinzia
mortgagebycinzia@gmail.com