I frequently meet people who are eager to buy homes but who have yet to save their down payments. Being on the sidelines and having to watch other consumers build their home equity is making them frustrated.
So, given all of the latest changes in mortgage rules, can a person purchase a home without having a down payment? The answer to this question is both yes and no.
Although the past does not determine the future, history does indeed show that for Canadians, owning a home is a major part of establishing financial security and strength.
If this is something that you’re ready to do for yourself, start building up your real estate deposit and then leap into home ownership.
When purchasing a new home, you will be expected to have access to a mortgage deposit that can be put towards the sales price. Lenders don’t want you to borrow your real estate deposit either. This has to be the money of your very own – whether you’ve saved it up or gotten a loan from family members.
The larger your mortgage deposit is, the smaller your mortgage is going to be. Currently, you are going to need to have approximately five percent of the home’s sales price saved up for the real estate deposit.
Lenders also want to know that you’ll have sufficient funds remaining at the time of closing to cover the land transfer tax, your closing costs, any related legal fees, the PST for the CMHC coverage premium, an advance payment on your property taxes, and cash for hooking up your utilities and getting your things moved in.
For these miscellaneous and unavoidable costs, your lender will usually want you to have an extra 1.5 percent of the sales price saved up also.
Possible sources of your real estate deposit:
1. Your personal savings
2. Your RRSP
You can remove money from your RRSP for your mortgage deposit without facing any tax consequences so long as it has been here for no less than 90 days – and you have as long as 15 years to put the funds back into your RRSP.
3. A monetary gift
Given how high the costs of owning a home currently are, a lot of young people are getting help from their family members when it comes to putting together a real estate deposit. This is perfectly acceptable to lenders, so long as a one-page “gift letter” is signed by you and your family stating this money has been given as a gift and is not a lown.
4. Can you borrow your mortgage deposit?
This is the very same problem that I had when purchasing my first house many years ago. I had an amazing credit score and a really good job, but I was not able to save up enough money for a decent real estate deposit.
I had a substantial line of personal credit that hadn’t been used, and I decided to apply it to my real estate deposit. I was terrified that the bank would learn about this and that the entire transaction would come to a grinding halt.
Well, it turned out that everything worked out – and I was able to use great saving and bonuses to pay this line of credit off – but this is NOT something that I would suggest doing.
Moreover, mortgage lenders currently have far more advanced computer systems than they did in time past along with underwriting processes that allow them to identify actions like this one.
Could you imagine discovering that either your mortgage insurer or your lender has decided to change its mind about qualifying you for a mortgage just days ahead of closing?
At the least – the real estate deposit that you’ve placed with the agent will be at risk – but the most likely outcome is that you will set off a chain reaction that affects every transaction connected to the purchase of your home.
However, there are new companies like Deposit Financing Canada, who are offering low-risk mortgage deposit loans. I’m not too sure if they’re the best idea for everyone buying a house, but I checked out the Facebook of Deposit Financing and it seems like they have decent reviews from their customers. You could possibly use them if the bank is okay with it.
You’ve probably given notice on your current home
Your seller probably has to bring this purchase to a close and move into his or her new home
And the seller that your seller is working with might have to bring their purchase to a close and move into their new home
And so forth
Why take such a risk? It could have a terrible impact on your life.
Ultimately, most people need to simply control their spending enough to save sufficient money for a real estate deposit. In theory, it is possible to purchase a home with zero down, but it might be a trifle dodgy, or it could entail a very high-interest rate.
For more on this topic please check out our blog post: Real Estate Deposits and Why Are They Needed? : Deposit Financing