The good news is you can still buy a house with no downpayment, the bad news is these programs are ending soon- October 31st to be exact. This means we can now add the no-downpayment products to the “mortgage casualty list” that we have witnessed getting lengthier over the past few years. This comes as no surprise with mortgage rule meteors aimed at reducing the mortgage debt exposure of the average Canadian. Good thing the disappearance of one product has not disrupted the evolution of the many other downpayment options still available.
The minimum downpayment required to still be eligible for best interest rates is 5% of the purchase price. Keep in mind, if you have less than a 20% downpayment, a high ratio insurance premium will be added to your mortgage amount. The more downpayment you have, the less the insurance premium is. Following are some brief details on eligible downpayment sources, as well as what kind of documentation you can expect to provide as confirmation of those funds.
For now, cash back, also known as zero downpayment, or 100% financing, cash back is a specialty product where the lender funds your mortgage and provides the downpayment all on your possession date. Since the lender is not requiring the full 5% minimum downpayment from your own resources, you will be asked to show the lender you have funds in your bank account to cover the closing costs. This will be at approximately 1.5% of the purchase price and will include legal fees, any property tax adjustments and other miscellaneous moving expenses. For example, if your purchase price is $300,000, you need to show the lender you have at least $4500 available to cover such closing costs.
This describes any funds that you have accumulated over time and would like to use towards your downpayment. These funds can be sitting in your bank account, RRSPs or investment account. Basically any account with your name on it. You can expect to be asked to provide a 90-day history of the funds along with a paper trail for any unexplained large deposits made within that 90 day period. If the funds are coming from your RRSP, you may be asked to provide proof the funds have been withdrawn from your RRSP and deposited into your bank account. Be sure to fully research if you are eligible for the First Time Home Buyers’ Plan which allows for RRSP withdrawal without as many income tax ramifications.
An immediate family member can gift you the downpayment funds to use towards your home purchase. Your lender will request confirmation of deposit of the gifted funds into your bank account and your family member will be asked to sign a gift letter stating the funds do not need to be repaid.
Known in our industry as the “flex-down” which allows you to borrow your downpayment funds with the understanding they will be repaid and the regular monthly payment must then be factored into your debt servicing. A secured or unsecured line of credit is the most commonly used leverage for a borrowed downpayment. You will be asked to confirm available balance and payment amount.
A less common version of a borrowed downpayment is seller financing or a vendor-take- back mortgage. This type of financing is exactly as it sounds in that the seller agrees to take less money at closing and instead finances your downpayment or a portion thereof. It is important to be aware of the many restrictions that come with this type of financing.
Even though cash-back products are soon to be extinct, there are still many other downpayment options available to you. If you are thinking of purchasing a home and want to know more about what option is for you, speak to a professional about the fine print of that product and your eligibility in applying for it.
As always, do not hesitate to contact The MortgageGirls if you have any questions or would like other mortgage information. Your professionals with personality are available over the phone at 866-932-8412 or email firstname.lastname@example.org. Stay in the loop by following us on Twitter @Mortgagegirlca.