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Tag: downpayment

  • Understanding the Statement of Adjustments and Trust Ledger

    Understanding the Statement of Adjustments and Trust Ledger

    The Most Important Documents in your Closing - Statement of Adjustments and Trust Ledger Statement.

    When you’re buying or selling a home, you will likely encounter two important documents called a Statement of Adjustments and a Trust Ledger Statement.  

    These two documents are the two that get the most attention from the buyer or seller, and are incredibly important because they help you make sense of the all costs and expenses that are associated with buying or selling a home. 

    To ensure that you manage your budgets and have a smooth closing, understanding your statement of adjustment and trust ledger are vital. They allow you to easily see the breakdown of all expenses and know decisively how much you will owe at the end of the day if you're the buyer, or how much you should expect to receive if you're the seller. 

    The way these documents are formatted is more like an accounting statement.   We know not everyone has an accounting degree, so follow along and you'll be able to understand these statement in no-time.

    What is a Statement of Adjustment?

    A statement of adjustment is very similar to your personal bank statement, however, instead of listing your personal transactions, it is a record of your Real Estate or Mortgage transaction. Statements of adjustment are used by both buyers and sellers to know exactly the proceeds they receive, or how much they owe to complete the transaction. 

    Essentially, the statement of adjustment will list the purchase price for the home followed by any additional costs that need to be added, finally subtracting any deposits already made to determine what will be the total cost at the time of closing.

    Example of a Statement of Adjustments

    Like an accounting statement, when creating a statement of adjustments, costs paid to the seller go under "credit seller". Whereas costs paid by the buyer go under the "credit buyer" column. 

    Here's an example for a residential property sold in Ontario.

    • The sale price is $500,000
    • There was a deposit of $50,000 made by the buyer
    • The seller pre-paid utilities at a cost of $500, however they only occupied the house for 150 days and need to be reimbursed for the half, therefore $250 will be credited.

    If you’re reading this correctly, the buyer will owe the seller $450,250 on closing, after accounting for the deposit and utilities adjustment.

    What is a Trust Ledger?

    Similar to the statement of adjustment, both the buyer and seller’s lawyers will create a trust ledger, this time with the purpose of showing how the money will be allocated after the closing.  If you are refinancing your mortgage, your lawyer will also prepare a trust ledger statement with the details of mortgage changes.   

    A Trust Ledger Statement is prepared for both the buyer and seller to show all remaining expenses for both parties. In the case of the buyer, after completing the statement of adjustments, the full amount payable to the seller is then moved over to the Trust Ledger Statement.

    The Trust Ledger Statement shows all of the money involved in the transaction on closing day, but also includes other costs such as legal fees and disbursements, land transfer tax, title insurance, etc. 

    For sellers, the closing costs they have are subtracted from the amount owed to them by their buyer to determine the total amount they will receive after closing (after a mortgage is paid off, for example).

    Example of Trust Ledgers

    In contrast to the statement of adjustment, a trust ledger will vary between a buyer and seller because they each will incur different costs after closing. 

    The Trust Ledger Statement shows the remaining expenses for both the buyer and seller on closing day, including legal fees and disbursements, realtor fees, land transfer tax, and so on.

    We will create an example trust ledger for the buyer in the previous example assuming he has incurred the following closing fees.

    • Legal fees - $4,800
    • Home inspection fees - $1,200
    • Land transfer tax - $12,000

    The seller's trust ledger will similarly start by bringing the price paid and subtract any associated closing costs to determine the total earnings from the sale for the seller. 

    We will create an example of the seller’s ledger assuming the seller pays the below closing costs. 

    • Legal Fees - $2,200
    • Real Estate Commission - $25,000

    As your purchase, sale or refinance transaction moves towards closing, you’ll receive copies of the Statement of Adjustments and Trust Ledger to review for accuracy.   It is important that you take the time to understand, review and ask any questions.

    If this looks overwhelming to you, rest assured that the Deeded team is here to make things easier and simpler. We walk you through all your documents and ensure that you understand every aspect of your transaction.

    Important Note: This article is not Legal Advice.  No one should act, or refrain from acting, based solely upon the materials provided on this website, any hypertext links or other general information without first seeking appropriate legal or other professional advice.

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  • Gifting a Downpayment:  What You Need to Know

    Gifting a Downpayment: What You Need to Know

    With rapidly increasing home prices greatly outpacing growth in salaries and incomes, it is becoming very difficult for first-time buyers to save for a downpayment so they can get into the housing market.

    As a result, it is now becoming more common for parents to assist their children gifting money towards a downpayment for a home.

    Gifting money towards a downpayment means that you are not obligated to repay the person gifting you the money. In most cases, the parents who are gifting money towards the down payment will not own an interest in the property either.

    In Canada, you can typically buy your first home by paying 5% down. However, it is advisable to put in 20% down. Because, when you pay less than 20%, you are obliged to purchase mortgage insurance, which increases your overall monthly payments.

    If you’re one of the lucky ones to receive a cash gift towards your downpayment, the buck doesn't stop there. Your lender will typically ask for something called a gift letter.

    A gift letter may be required by your lender to show and prove that you are indeed getting a part or your entire down payment as a gift and from who. It’s an important distinction that proves that you do not have any other debt obligations when applying for a mortgage. 

    Key Takeaways:

    • • A gift letter is a document used by mortgage lenders to ensure that monetary assistance given by family members to help you cover a mortgage down payment will not need to be paid back.
    • • Mortgage Gifts may only be made by direct family members and are non-taxable in Canada.
    • • While gift letters are enough to help you cover your down payment, mortgage lenders require far more proof before they certify your loan.

    What is A Gift Letter?

    A mortgage gift letter is a document completed by your benefactor (the person or people giving you the money) that declares that a one-time monetary contribution they’ve made to you has been given as a gift to be used for the down payment of the mortgage you are applying for. 

    The distinction in a gift letter that the money given, is a gift, is important as your mortgage lender needs to confirm that you will be under no obligation to pay the money back. 

    Your mortgage lender wants to know that you are financially capable to make your monthly mortgage payments to them. If they cannot confirm that the money you receive from your benefactor is a gift, they will see it as added debt that will increase your financial stress and make it more difficult to pay your mortgage. Therefore, there is a possibility that they may not approve you for the mortgage.

    What Does a Gift Letter Look Like?

    Many financial institutions will have templates or examples of gift letters that you may use, however if you choose to write your own, make sure your gift letter includes:

    • • The name of the mortgage borrower.
    • • The donor’s name, address, and phone number.
    • • The donor’s relationship to the borrower.
    • • How much is being gifted and when it was gifted.
    • • A statement saying that the money is a gift and that it is not to be paid back
    • • The property’s address.

    Will a Gift Be Taxed?

    Unlike the United States, Canadians don’t have to fear a “gift tax”. You can be gifted any amount of money at any time with no tax implications.

    Gifting a downpayment must be made by a member of your immediate family. That includes parents, siblings and grandparents. In rare circumstances, individuals with special relationships (such as godparents or close family friends) may request permission from your lender to provide a mortgage gift. 

    The amount of your mortgage down payment that may be covered by mortgage gifts can vary from lender to lender.

    It’s important to remember that although you may receive help from family to cover your down payment, that may not be enough to ensure you are approved for a mortgage. You will need to ensure that you meet criteria in terms of credit score, income and much more.

    As helpful as gift letters can be, there are many rules and criteria you need to review before you can be approved. If this looks overwhelming to you, rest assured that the Deeded team is here to help however we can.

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  • Should You Consider Taking Advantage of the Home Buyers’ Plan (HBP)?

    Should You Consider Taking Advantage of the Home Buyers’ Plan (HBP)?

    Are you actively contributing to a Registered Retirement Savings Plan (RRSP)? If so, the Home Buyers’ Plan (HBP) can help you increase your down payment amount and purchase the home you want. The HBP allows you to withdraw from your RRSP account so you can build or buy a home for yourself or someone with a disability that's related to you (by marriage, common-law, blood, etc.)

    As of March 2019, the Canadian HBP withdrawal limit is $35,000. That can go a long way toward buying or building your home. That said, it’s important to fully understand how the HBP works before you decide if it’s right for you.

    How Does The RRSP Home Buyer’s Plan Work?

    To withdraw from your RRSP account for the Home Buyers’ Plan, you’ll have to inform the Canada Revenue Agency and apply through your financial institution. As mentioned, if you qualify, you can extract up to $35,000 tax-free to use as a down payment for the purchase or construction of a home. Here’s what you’ll have to do to get started:

    • Contribute to an RRSP - You can only qualify for the HBP if you have enough money in an active RRSP account, for at least 90 days prior to withdrawal. While you normally cannot withdraw from this type of account (penalty-free) until you’re of retirement age, the CRA makes an exception for qualified homebuyers.

    • Be a Canadian first-time homebuyer - Only permanent residents who are buying or building their primary residence (or doing so for a disabled person) can qualify. If you’ve already used the HBP for yourself and want to do the same for someone else, you must have a zero balance on your original account.

    • Submit the right forms - You must also visit the CRA website, fill out Section 1 of Form T1036 and bring it to the financial institution that holds your RRSP account. They will then complete Section 2 and, if you qualify, will send you the form T4RSP, which confirms how much you have borrowed from the account.

    • Buy the home and withdraw - Once you meet all the criteria, you must withdraw the appropriate funds within 30 days of purchasing the home’s title, using a loan from your financial institution. If you wait more than 30 days, you will no longer qualify for the HBP and any money you withdraw will be subject to tax.

    Declaring Your HBP Withdrawal and Repaying Your Debt

    Once you’ve purchased your home, you must declare your T4RSP form on your income tax return for the same year the withdrawal was made from your RRSP account. Afterward, your annual CRA Notice of Assessment will display the amount you have repaid, what you have left to pay, and how much your next payment will be.

    You will then have 2 years before you must start paying back what you’ve borrowed. Typically, this is done in yearly installments to your RRSP through your financial institution, over a maximum period of 15 years. Each payment must be made within the same year it’s due or within the first 60 days of the following year.

    Other Requirements to Qualify for the Home Buyers’ Plan

    • • You cannot have owned another home within the 4 calendar years prior to applying for the HBP
    • • You must first enter a written agreement to purchase or construct the home
    • • You have to start living in the home within 1-year of its purchase
    • • If you’re buying a home with common-law partner or spouse who isn’t a first-time homebuyer, you can’t have lived in their primary residence for more than 4 years

    Benefits and Drawbacks of The Home Buyer’s Plan

    Now that you know what the RRSP Home Buyer’s Plan is and how you can withdraw from it, here’s a list of some of the main pros and cons of the process:

    Benefits

    • • The loan will be tax and interest-free
    • • Your taxable income will decrease when you claim your RRSP contributions
    • • Two first-time homebuyers can combine their plans for a total of $70,000
    • • A larger downpayment means you’ll need to borrow less
    • • You only have to start paying it back after 2 years (total of 17 years to repay)

    Drawbacks

    • • You won’t gain any interest on your funds like you would if they were invested
    • • Contributions you pay back from your HBP won’t count toward your deductions
    • • Being a homeowner with other expenses can make it difficult to repay your debt
    • • You must declare any missed RRSP payments on your taxes (and pay for them)

    Do I Still Need a Down Payment If I Take Advantage of the HBP?

    These days, it’s nearly impossible to find a home that doesn’t require a down payment. In fact, if your home costs $500,000 or under, your mortgage provider will require a minimum down payment of 5% of the home’s asking price. If your home is between $500,000 and $1,000,000, you can expect to pay at least 15% down (5% on the first $500,000 and 10% on anything over that, up to $1,000,000).

    So, if the money you withdraw from your RRSP Home Buyers’ Plan doesn’t sufficiently cover your minimum down payment, you may not qualify for a mortgage and the rest of the funds will have to come from your own pocket.

    Can You Purchase a Second Home Using The Home Buyers’ Plan?

    Fortunately, you can be eligible for the Home Buyers’ Plan a second time, as long as you haven’t owned a home within the past 4 years. So, if you want to sell your first home and live in an apartment to save money, you can reapply as a “new” homebuyer 4 years later.

    As mentioned, whatever balance remains on your previous HBP account must also be fully repaid before you can qualify a second time. The same sort of rules apply if you’re buying a home for a disabled relative.

    What If My Spouse Owned a House Less Than 4 Years Ago?

    If you’re purchasing a home with a spouse who owned a house less than 4 years ago, but you did not live in that house with them, you are still eligible to use the HBP. Just keep in mind that only you will be able to withdraw $35,000 from your RRSP, not your spouse.

    How to Decide if The Home Buyers’ Plan is Right For You

    Although the RRSP Home Buyers’ Plan can be the perfect solution for first-time homebuyers, it can also be an expensive and lengthy debt to take on, particularly when you consider all the other costs that come with being a homeowner in Canada. In fact, there are cases where you should and shouldn’t take advantage of the HBP:

    The Home Buyers’ Plan Could Be Right For You When…

    • • You’re a first-time homebuyer or haven’t owned a home in at least 4 years
    • • You and your spouse/partner can combine your HBP funds
    • • You’re trying to purchase a home for someone with a disability
    • • You have automatic RRSP contributions set up with your financial institution
    • • You still have enough money in your RRSP to keep your retirement on track
    • • You don’t have enough for a 20% down payment (which would help you avoid having to pay mortgage default insurance)

    The Home Buyers’ Plan Could Be Wrong For You When…

    • • You have owned a home within the past 4 years
    • • You already have enough for a 20% down payment
    • • Your retirement would be greatly delayed due to your withdrawal
    • • You would be withdrawing all of your RRSP funds (no interest gained)
    • • Would not be able to afford your annual payments
    • • You have an unsteady income, bad credit, or a lot of existing debt

     This is a Guest Post from our friends at Loanscanada.ca.  

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