Once your client is ready to purchase a new home, securing a mortgage pre-approval should be one of their top priorities as it will help them define their budget.

As their mortgage professional, you will need to request their consent to pull their credit report and gather documents that verify their employment and income. You must also determine the amount of their down payment and identify the current location of those funds.

This can be one of the most challenging aspects of the homebuying process, primarily due to the necessity of complying with Anti-Money Laundering (AML) regulations. However, this verification process is essential to ensure all funds are legitimate and traceable.

By guiding your clients and ensuring they understand the importance of organizing their financial information, you will reduce potential stress for everyone involved, and most importantly increase your clients’ chances of a successful transaction.

Anti-money laundering compliance is a big deal!

The government is very serious about Anti-Money Laundering (AML) compliance.

Earlier this year, Global News reported “An internal report from Canada’s financial crimes watchdog (FinTRAC) found that most banking and real estate companies FinTRAC audited last year are not following the country’s anti-money laundering laws, sparking calls for greater oversight and higher fines. “

The stringent AML requirements can extend the verification process and introduce unexpected challenges, even for clients with strong financial backgrounds and excellent credit histories. These regulations reflect a broader trend where compliance requirements are intensifying, often leading to more comprehensive and sometimes invasive financial scrutiny.

Balancing regulatory compliance with efficient client service can be a challenge for both clients and brokers. That’s the nature of our industry. Your goal should always be to ensure your clients’ financial activities are transparent and well-documented to meet lender and regulatory standards without compromising your clients’ experience.

Canadian brokers’ sentiments on down payment verification

“Last month I had a file where we had to go 13 months back over five accounts. In every statement there was a large transfer between accounts… I have the conversation with clients at the pre-approval stage to leave all monies put until we need to show our DP.” – Dustin Arruda

“By far the worst part of the job. Down payment proof is the worst in these situations.” – Jim Tourloukis

“It’s the worst! Best practice is get them early enough and have it moved all into one account. I’m going through this right now on one of my files where they have five different accounts being used for payment. UGH.” – Brayden Hooper

“Down payment docs are the bane of every broker. I advise clients to consolidate their accounts months prior and to keep the funds static, but there are always exceptions that complicate the process.” – Zhino Othman

Industry standards & challenges with down payment verification

Most mortgage lenders will require you to provide a 90-day history of all monies used for the down payment. Occasionally, they can go back even further. While reviewing these account statements, they will ask for detailed explanations (and corroborating documents) for any large deposits. (The definition of “large” varies, depending on the lender. It might be $2,000 or more.)

For both conventional and insured mortgages, you must ensure all of the funds for your client’s down payment and closing costs are traceable and well documented.

Any non-employment related deposits, such as gifts from family members or proceeds from the sale of assets, must be clearly explained and supported by appropriate documentation. This kind of preparation helps avoid delays and promotes the likelihood of a smooth transaction.

Requirements for conventional and insured mortgages

For conventional uninsured mortgages, a few lenders might accept just 30 days of account history, but most will require at least 90 days.

And if the purchase is high ratio, insured (less than 20% down payment) that will always require 90 days of account histories.

I say “at least” because there may be deposits within the 90 days that require a close look at a source account, going back 90 days from the day of that deposit. I have seen where that sort of “rabbit hole” led to yet another source account and the entire verification went back fifteen months!

3 Common challenges in verification

In recent months, we have processed several purchase transactions where the verification of the down payment proved quite challenging. In most cases, the primary reason for the stress and consumption of time was too many accounts and frequent money transfers between them.

Here are some examples we commonly see:

1. Transferring between accounts

There is something called “account hacking,” where clients transfer money between multiple accounts and financial institutions in an effort to maximize interest or reduce account fees. 

While this may benefit the client financially, it complicates the verification process. Each transfer must be traced and documented, and any large or frequent transfers may raise red flags for lenders, who will require detailed explanations and corroborating documents. Plus, in most cases the perceived financial benefits are quite small.

2. Multiple borrowers means more work

Most purchases involve two applicants, meaning potentially double the number of accounts to process. 

Each borrower may have multiple accounts, including chequing, savings and investment accounts, all of which need to be reviewed. This not only increases the volume of documentation, but also the complexity, as transfers between the borrowers’ accounts must also be explained and verified.

3. Minimal documentation for investment accounts 

Investment accounts often do not generate regular statements, further complicating the process. These accounts may only produce statements every three or six months, making it difficult to provide the necessary documentation on short notice. 

Additionally, some investment accounts may have transactions that are less straightforward, such as dividends, interest payments or stock sales, each of which must be documented and explained.

A simplified approach

You can be sure our lender partners also struggle with the down payment verification process. On a busy day, an application whose supporting documents look like a dog’s breakfast may find itself way down the list of their priorities. 

To avoid complications during the down payment verification process, it is advisable to have your client(s) consolidate their funds into a single account ideally, well in advance of purchasing a home. This preparation should start months before making an offer.

The chosen account does not need to be a checking account. If your client is concerned about loss of interest, the money can all be parked in a high interest savings account, or even a cashable GIC to maintain interest earnings while ensuring funds are easily traceable.

Worth noting

Proof of down payment can be a pain, but we should not let this part of the process sour our clients’ overall experience. Always assume any money that is not income from employment needs to be explained, and all source accounts need to be documented for your lender.

Every client’s financial situation is unique, and it can take hours to organize and present the information in a way that lenders can easily process. Clear and concise documentation is crucial to avoid mistakes and ensure a smooth transaction with your lender.

It’s important to mention, for existing homeowners planning to sell their current home and purchase another, the process is generally simpler, as most or all of the down payment typically comes from the sale proceeds. This reduces the complexity of tracing multiple sources of funds.

By encouraging your clients to proactively manage their finances and maintain organized records, you can streamline the mortgage approval process, making your job easier and increasing the likelihood of a successful and timely transaction.

Here is a typical list of down payment sources:

• Stocks, mutual funds and other investments
• RRSPs, FHSAs and TFSAs
• Savings accounts, chequing accounts and GICs
• Money gifted from a relative
• Money wire transferred from another country
• E-transfers and other deposits into source accounts
• Repayment of loans by others to you
• Crypto currency accounts

Cryptocurrency as a down payment

Cryptocurrencies, once considered a fringe element in real estate transactions, are becoming more mainstream, prompting brokers to navigate new regulatory landscapes and lender criteria.

If our client is adamant about using cryptocurrency for their down payment, it’s essential for brokers to accurately track and verify cryptocurrency transactions by aligning them with our client’s traditional banking records. This ensures all financial activities meet lender requirements and comply with regulatory standards.

Jason Chapman further expands on this theme by sharing his own experiences with clients who prefer crypto assets. He has noted a lack of consensus among lenders on accepting cryptocurrencies as legitimate sources for down payments, which has led him to extensively search for lenders who are open to these modern financial practices.

This proactive approach highlights the necessity for brokers to stay informed about the evolving standards and regulations in the financial industry, enabling them to provide better service to clients who engage in digital asset transactions.

Meanwhile, if you can convince your crypto-loving clients to park their money in a high-rate savings account for a few months, you may avoid lender hassles. Easier said than done, though, as crypto investors are often not comfortable about being “out of the market.”

5 best practices from mortgage industry professionals

Many Canadian mortgage professionals, including myself, have developed strategies to streamline the down payment verification process.

1. Early preparation & client education

Initiating conversations early in the mortgage process helps clients prepare their finances, reducing last-minute documentation challenges. Sending detailed communications at the onset of the mortgage process underscores the importance of maintaining stable financial behaviour and setting clear expectations for clients.

It is essential for brokers to obtain all account statements upfront and guide clients to refrain from significant financial activities after document submission. This proactive step ensures that financial profiles remain stable throughout the approval process.

“In my opinion, it’s easier for clients to consolidate the funds after the down payment has been signed off.”

Jason Armstrong

By setting expectations from the start, mortgage brokers can guide clients to maintain stable financial habits, which simplifies the review process.

2. Incorporating apps & technology

Utilizing digital tools such as spreadsheets or Google Sheets to monitor and explain account activities is a recommended approach. This not only aids brokers in keeping organized records, but also simplifies the review process for your lender’s document specialists.

3. Collaboration with financial advisors

Pat Delaney notes that sometimes there is a need to involve a client’s financial advisors early to clarify complex money movements and provide a clearer financial picture to lenders, often circumventing the need for extensive additional documentation.

4. Make sure to keep comprehensive documentation

Employing detailed documentation practices, including the use of visual aids like colour-coded highlights, helps clarify the flow of funds. This approach is extremely beneficial for outlining the origins and destinations of funds clearly, aiding both broker understanding and lender reviews.

 5. Be adaptable

Handling down payment proof requires patience, perseverance and a proactive approach. As the mortgage industry evolves, brokers must adapt by employing new strategies and technologies to ensure smooth transactions.

This includes leveraging digital tools (for example, Ron Butler mentions FLINKS), staying informed of changes in AML regulations, and continuously refining our processes to meet our clients’ needs efficiently.

By doing so, we can help ensure a seamless mortgage approval process and a positive experience for our clients.

What to take away from all of this

While I agree it is always preferable to have very few accounts to review and present to our lenders, we understand most people do not keep their money in one place these days.

If time permits, we always advise our clients to organize their funds well in advance into one or two accounts. This streamlines the verification process, making it quicker and more straightforward for both clients and mortgage professionals.

However, if consolidating funds ahead of time is not possible, there is no need to worry. We have extensive experience navigating these challenges and will work diligently to sort through the various accounts and transactions.

As mortgage professionals, our goal is to ensure a smooth mortgage approval process, regardless of the initial complexity. With patience and a systematic approach, we will always find a way to make it work. So, while early organization is ideal, it’s incumbent upon us to be well-prepared to handle any financial scenario that comes our way.

broker tips down payments mortgage tips proof of down payments ross taylor

Last modified: August 5, 2024