November 8, 2018 SEP Dev

Do You Qualify for a 5% Down Payment?

This is right up there as one of the most commonly asked questions. Do I qualify for a 5% down payment? A 5% down payment is actually the absolute minimum that any buyer is required to provide. However, if you’re trying to determine whether you are eligible for the minimum 5% down payment, as opposed to putting a larger down payment, then this list should help:

Here are the requirements to qualify for a 5% down payment:

(It may not be common knowledge that the decision to qualify an application for a 5% down payment is ultimately up to the default mortgage insurers; CMHC, Canada Guarantee or Genworth, even if the bank themselves are okay with the overall application)

  • Must be an owner occupied home, second home or vacation home
  • Home must be located within an area that demonstrated strong re-sale/marketability (to be clear, this includes almost all areas within the GTA. Area outside of the GTA may require further information)
  • Property (purchase price) must be <$1,000,000
  • Amortization cannot exceed 25 years (30+ year amortization only available for uninsured deals)
  • Income: typically needs to be provable (salaried/hourly employee, business for self with provable tax documents, etc.)
  • Minimum credit score (ex. 650 beacon – exceptions may apply depending on the report details)
  • Debt servicing ratios cannot exceed 39% (GDS) and 44% (TDS)
  • Down payment cannot come from borrowed sources especially under the 5% down payment program (acceptable forms of down payment can be personal savings, RRSP withdrawal, investments, gifted funds, proceeds from previous sale, sweat equity, etc.)
  • Subject to mortgage default insurance premium of 4%

Note: A minimum 5% down payment is eligible on properties that are <$500,000. For properties in excess of $500,000, 10% is needed for the value in addition to $500,000. (ex. A $700,000 property will require a 5% down payment for the first $500,000 ($25,000) and 10% for the additional $200,000 above and beyond ($20,000). Under this example, the total down payment needed is therefore $45,000 as opposed to $35,000 ($35,000 being the 5% down payment on $700,000 if the rules had not changed in early 2017).

If you do not meet a criterion from the above list, it does not mean you automatically do not qualify for a 5% down payment. Again, many applications can be worked on a case by case basis so if the concern is very miniscule overall, sometimes the banks/insurers can make exceptions under the 5% down payment program. However if I can mention one thing with certainty, it’s that in order to qualify for a 5% down payment, credit is usually very heavily weighed on and therefore it’s really important to have credit that is in tip top shape. Credit scores are a good reflection of the borrowing power, but the history on the report is more important than ever before. This leads into me next point below.

It’s necessary to mention that the 5% down payment program may not be available to buyers who have been through a past bankruptcy or consumer proposal, even if the minimum requirements are met to get an insured mortgage one again (Minimum requirements being; 2 years since discharge with re-established credit, 2 new active trades since discharge, etc.). Usually for such scenarios, 10% would be required as opposed to the minimum 5% down payment.

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