From time to time I meet people who are anxious to buy a home, but have no 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.
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).
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.
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.
Many years ago when I bought my first house I had this exact same problem. I had an excellent credit score, and a great job, but had not managed to save enough money for a proper down payment.
I had a large unused personal line of credit which I decided to use towards my down payment. I was petrified the bank would somehow be able to see I had done this and that the purchase transaction would come crashing down around me.
Well, that time it all worked out just fine – and I was able to pay off the line of credit quickly from bonuses and intense saving – but it is NOT a strategy I would recommend for you.
Besides, today the lenders have far more sophisticated computer systems and underwriting processes to detect such activities.
Can you imagine finding out a couple of days before your closing date that the lender (or mortgage insurer) has changed their mind and you are no longer qualified for a mortgage?
At the very least, your deposit with the real estate agent would be at risk – but more likely you would set off a domino effect on all the other real estate transactions connected to your home purchase.
Why take this chance? It could really mess up your life.
The bottom line is most of us must curb our spending enough so we can save our down payment as soon as possible. Zero down is theoretically possible, but it’s either a touch dodgy, or it’s rather expensive in terms of the interest rate.
Related Article: Financing a home purchase that needs renovating
Related Article: Closing costs when buying a home
Don’t drive over the speed limit. You’ll save money on gas and on the wear and tear of your car. Makes sense.