Regardless of whether you are a first-time homebuyer or not, have you noticed a lot of advertising for buying a home with “no down payment” or “100% financing”? Many people ask Jackie, The MortgageGirl about buying with no money down and she say’s ‘just because you can, doesn’t mean you should’. A down payment, often referred to as Flex Down or Borrowed Down, is a borrowed down payment option. This product allows you to purchase by borrowing your down payment from a personal line of credit or using a personal loan
Under this program, you must not only qualify for the mortgage but also to “borrow” the down payment. This can become a risky undertaking if not done responsibly. The optimal way to decide if you should or shouldn’t borrow your down payment is to ensure you fully understand the important details of this product offering.
There are a few options available when borrowing for your down payment.
- The first one is to borrow against an asset; which is referred to as ‘secured’ borrowing. This would involve the refinance of another property, a home equity line of credit or a loan secured by investments.
- Another option is ‘unsecured’ borrowings such as from credit cards, personal lines of credit or a loan taken from a lender such as a bank, credit union or loan company.
- The third option is seller financing or a vendor-take-back mortgage. This is where the seller of the property you are buying takes less cash up front and effectively carries a 2nd mortgage for you. ****Many conditions are attached to this type of borrowing****
Can You Qualify?
There are a number of important factors to consider:
- Additional financing costs – Instead of a 4% insurer premium you will pay a 4.50% premium which is added to the mortgage. You will still have access to competitive rates, but because lender options are so limited it may not always be as low as the rate available for a saved down payment.
- Limits your maximum purchase price – The payments for this new down payment debt must be included in your qualifying ratios. This increases your monthly debts which could likely decrease your maximum purchase price.
- Higher credit score requirements – You must have a credit score of at least 650 to qualify under this program
- You still need some money up front – You must prove to the lender that you can cover your closing costs from your own resources which could total as high as 1.5% of the purchase price depending on which province you buy in.
Other Down Payment Options
While borrowing your down payment is an option, it is not the only one. There are other down payment sources that are acceptable to the many lenders. This includes, but is not limited to;
From Own Resources– this is when you have saved up your down payment funds and can show a recent 90-day transaction history of accumulation of those funds to the lender. Most common sources are a savings or chequing account, RRSPs, investments or a TFSA.
Gifted– All lenders will allow downpayment funds to be gifted from an immediate family member. They usually only ask for proof of funds by a signed gift letter and confirmation of deposit of those funds into the borrower’s bank account. Do be advised some lenders are now also asking for proof of the source of the funds from the individual who is gifting the funds. ****NOTE**** Some product offerings do not allow gifted down payments.
If you have any questions as to whether your funds are eligible for downpayment consideration do have a chat with the mortgage professional you are working with.
When borrowing your downpayment is a good idea
It is a great option for someone who currently has low debt, strong credit and is buying below their maximum purchase price. The Mortgagegirl says this because it takes most people 2-3 years to save up a down payment. Instead of paying down your landlord’s mortgage, pay down your own down payment loan! Last words of advice, it’s important to have an exit strategy on how to pay off that additional debt while also making the required mortgage payments. Perhaps treat it like a savings plan with both a start and end date,
If you want to know if the Flex Down option is for you, call Jackie, The MortgageGirl at 780.433.8412 or firstname.lastname@example.org. Jackie has been working with mortgages for over 35 years. ‘Benefit from Experience.” Follow the MortgageGirlca on Facebook and on Twitter @mortgagegirlca. .