100% financing, no down-payment mortgage, cash-back product, whatever you want to call it, it’s pretty much the same thing; getting a mortgage with no downpayment. Here are some things you should know if you are thinking of buying a home with a no downpayment mortgage.
Higher Interest Rates
Because they’re lending you basically 100% of the purchase price, the lender is not going to give you best rates. You can expect your interest rate to be about 1-2% higher than best rates for these types of products.
Higher Payout Penalties
Most zero downpayment mortgage products have 5-year fixed terms. If you break your term early, you will have a regular payout penalty AND you will probably have to pay back some of that 5% you borrowed in the first place. For instance, if you broke your term in year 3 of your 5 year term, you can pretty much divide your 5% downpayment in 5, times it by 2 to give you the downpayment amount you have to pay back, on top of your payout penalty. (5%= $15,000 / 5 = $3000/year X 2 years left on your term= $6000 + regular payout penalty.)
Qualification guidelines are more strict
To a lender, a downpayment is your investment into the property you are purchasing. In a lenders eyes, the more downpayment you have, the less likely you are to default on your mortgage payment because you have more invested into the home. If you do not have a downpayment available, the lender will be looking to mitigate that risk with other factors. Most common thing they are looking for, good credit, you cannot have any derogatory credit, old or new, if you are applying for 100% financing. The lender will also like to see that you have a stable income and some savings in case of a house emergency.
Since the lender is giving you the downpayment too, they want to see that you have some of your own cash to close the mortgage. Rule of thumb is you should have about 1.5% of the purchase price available in your bank account to cover things like lawyer fees, interest adjustment, property tax adjustment, and the other closing costs involved with buying a home.
Other Downpayment Options
Instead of borrowing your downpayment from the same lender who is giving you the mortgage, you can get it from your bank. If you can borrow a downpayment from your bank instead of your mortgage company, you can still get best rates. I don’t want to put all the details on the internet because every situation is different, but call us to discuss if this strategy may work for you.
What we tell everyone is, if you can get a 5% down-payment, do it! No downpayment mortgage products tend to be more restrictive and more expensive, so if you can save up or borrow your downpayment, that may be a better idea in the long run. Keep in mind, these types of products exist because borrowers need them, if you would like more details on different NO downpayment products, visit our website at mortgagegirl.ca