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4 ways to buy a home with no down payment

no downpayment4 ways to buy a home with no down payment

From time to time I meet people who are anxious to buy a home, but do not have as little as a five percent down payment saved up. They are frustrated being on the sidelines and watching everyone else grow their home equity.

So, with all the recent changes to mortgage rules, is it still possible to buy a home with no down payment? The answer is yes and no.

While the past is no guarantee of a future outcome, history tells us that home ownership is a key component of building financial strength and security for Canadians.

If you want to join the club, put together a down payment, and take the leap to home ownership.

When you buy a home, you are expected to have access to a down payment towards the overall purchase price of the home. Lenders do not want the down payment to be borrowed. It has to be your own money – either money you have saved up, or money given (not loaned) to you by relatives.

The larger your down payment, the smaller your mortgage will be. These days, you need at least 5% of the purchase price of the house ready for a down payment.

The lenders also want to see you have enough additional money on the day of closing for costs such as legal fees, land transfer tax, PST on the CMHC insurance premium, possible property tax advance payment, and things like utility hook ups and moving costs.

Typically, lenders will want to see an additional 1.5% of the purchase price for these unavoidable miscellaneous costs.

Sources of the down payment :

(1) Your personal savings

This money can be invested almost anywhere, as long as you can get at it before the closing date. Could be in a savings account, or a GIC, or mutual funds, or maybe your tax free savings account (TFSA). As long as you have a 90 day history of savings with no large (over $2,000) deposits this will suffice. If  you do have one of two large deposits, expect to be asked for proof of where those funds came from as it may look unusual to your normal savings habits.

(2) Your RRSP

If you have already accumulated monies in an RRSP, you could use up to $25,000 (for each of you) from your own RRSP to use as a down payment.

As long as the money has been inside an RRSP for at least 90 days, it can be removed without tax consequences to help you buy your home – and you have up to fifteen years to put it back inside your RRSP.

(3) A gift

With the cost of home ownership so high these days, many young people turn to their relatives for help with their first down payment. This is fine with the lenders, as long as both you and your relatives sign a one page ‘gift letter’ stating the money is a gift, rather than a loan.

(4) Borrow your down payment?

Important!

First of all, this is not exactly kosher. Practically all lender commitments have a clause which says the down payment may not be from borrowed sources. Yes, we all know people who have done this to some degree, but it sure does place additional strain on your monthly payment obligations.

 

This is a possible scenario however it is only offered by a few institutions. You may borrow the down payment from a Loan, Line of Credit, Credit card or some other means, even a friend. Normally the institution lending you the funds for the mortgage doesn’t offer down payment solutions, rather it is up to you to source these, but a broker can often help you find an option. There are slightly higher rates and insurance premiums for this product.

The key is the loan or other means borrowed must be paid back and a payment on the borrowed funds is taken into consideration when qualifying for the mortgage.


Related Article:
Financing a home purchase that needs renovating

 Related Article: Closing costs when buying a home

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