Many buyers 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.
[notice]Somebody has to come up with at least a 5% down payment, but it does not have to be you the borrower. Read on.[/notice]
Alternate sources of the down payment
(1) Borrow your down payment
Many mortgage lenders state your down payment may not be from borrowed sources. But mortgage agents and brokers have access to lenders who are okay with this.
You do have to be careful the new debt you take on does not adversely affect your debt service ratios to the point where you may no longer qualify for a mortgage. If it is from revolving credit, practically all lenders will impute a monthly payment of three percent of the balance, regardless of the actual arrangement you have.
(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. This is the RRSP HomeBuyers Plan (HBP)
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) First borrow for your RRSP, then use the HBP
Another strategy some lenders are okay with is to set up an RRSP loan with your bank or credit union, with as long a repayment term as you possibly can. (That keeps the monthly installment payment low) You have to be careful the new debt you take on does not adversely affect your debt service ratios to the point where you may no longer qualify for a mortgage.
Keep the money in there at least 90 days, and then the RRSP HomeBuyers Plan allows you to use this money towards your down-payment as above.
(4) Cash back from your lender [ please note, after July 01 2015 this will no longer be possible]
Only a few lenders (and it’s not the chartered banks) will help solve this problem by ‘giving you’ up to 5% of the purchase price of the home.
The rest of your application will have to be pretty strong – good employment and income, and high credit scores. But this works. It means you may only have to come up with enough savings for your closing costs. (On a $400,000 purchase, that means $6,000)
The trade-off is you will not be eligible for super-duper low interest rates. If you had the down payment already, you may be eligible for a five year rate of say 2.69%. With RMG Mortgages you can take cash back up to 3% of the down payment, and your five year mortgage interest rate will be no more than 3.74%. This is pretty awesome though as it can mean the difference between being a homeowner or a tenant.
(5) 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.
If you have excellent credit, stable employment, and healthy income, buying a home without having saved up for your down payment may work for you. Make sure you review your finances in detail with a mortgage specialist before you make a binding commitment though. This strategy is not for everyone.
P.S. Mortgage 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, they will want to see an additional 1.5% of the purchase price for these unavoidable miscellaneous costs.