Before you continue reading you need to know you must have, at least, some savings to buy a home. Our specialty is working with clients that have not had the chance to save up what is needed and we customize a plan to get you into owning a home as soon as possible.
Firstly, let’s recap the current guidelines for the lowest down payment options:
- Purchase Price of Up to $500,000: The minimum down payment required is 5% and below we will talk about the sources and options for that down payment
- Purchase Price of Over $500,001: If the purchase price is over $500,001 then you will require 5% of the first $500,000 and then 10% of the balance. For example, if the purchase price is $600,000 then it would be 5% of $500,000 and then 10% of $100,000 with a total of $35,000 down payment which is technically 5.8% of the purchase price
- Purchase Price of $1,000,000: You will require the full 20% down payment
Let’s consider your options based on the fact that you either don’t have any down payment saved at all right now or have only a portion of what you require based on your desired purchase price:
Borrowing Your Down Payment
If you have an excellent income AND credit rating, there are lenders that will allow you to borrow your down payment. The additional payments you will make on the amount you borrow will have to be included in your qualifying ratios as well as ensure that this is still affordable for you and fits your budget – you don’t want to end up house-poor!
You can use many different sources to borrow your down payment, and we can assist you in all of these, such as:
- a line of credit
- credit card
- personal loan, or
- family member
With excellent credit and stable income, your interest rate will be fully discounted. Do YOU have excellent credit? Find out here.
Gifted Down Payment
A “gifted” down payment is a great option especially for first time home buyers. Basically a close family member will provide you with a financial gift that makes up your down payment. The close family member might be a very loving parent, grand-parent, or sibling among others!
The only requirement is that the person who is providing the funds sign a Gift Letter that indicates that the money does not have to be re-paid, and then provide us with a snapshot of the gifted funds being transferred into your bank account – preferably within two weeks of your closing date. You will still need to have enough funds for your closing costs from your own savings which typically range from 1% to 1.5% of your purchase price.
Cash Back Mortgage to Pay Closing Costs or Debt
A cash back mortgage is where a lender provides you with a percentage of the mortgage amount on closing – it can range from 1% to 5% of the mortgage amount. This is payable to your lawyer on closing and can be used to pay for minor renovations, furniture, moving expense, closing costs, or paying off debt to qualify for the mortgage …. maybe a nice holiday or honeymoon! The interest rates are slightly higher than discounted rates as the cost of the cash you are getting is built into the mortgage but could still be worth it and often cheaper than borrowing from a credit card.
Sweat equity is where you provide labour to complete, or renovate a property… literally “sweat” as part of the down payment. This is your contribution by adding value to your new home by making improvements at your own toil. The more labour applied to the home, and the resulting increase in value, the more sweat equity that can be used as down payment.
You might be familiar with this thru Habitat for Humanity, where families who would otherwise be unable to purchase a home contribute sweat equity hours to the construction of their own home, the homes of other Habitat for Humanity partner families or by volunteering to assist the organization in other ways.
Once living in their new home, the family then make interest-free mortgage payments into a revolving fund which then provides capital to build homes for other families.
The sweat equity that is created must be done to code and only if you are a licensed trade. The most common example of this is you are an electrician, plumber, dry waller or carpenter and are going to complete this type of work on your own property prior to closing and will receive a credit for this by the current owner (usually a developer or builder). This credit is NOT reducing the purchase price, but instead makes up the down payment(all or part).
Not every lender will consider this as down payment and it must be approved beforehand so it’s important to make sure you reach out to us to confirm the specific criteria for your situation and if it is a good fit for you. The lender may also still require additional down payment from another source and not all from sweat equity. Here are two of the most comment examples:
- Up to 10% of the Down Payment Dollar Amount from Sweat Equity (not based on Loan to Value and Purchase Price): This refers to the lender only using 10% of the down payment. For example, if the total down payment is $50,000 then only $5,000 of this can be thru sweat equity.
- Up to 50% of the Down Payment Dollar Amount from Sweat Equity (not based on Loan to Value and Purchase Price): This refers to the lender only using 50% of the down payment. For example, if the total down payment is $50,000 then only $25,000 of this can be thru sweat equity.
The Home Buyers Plan allows home buyers to withdraw up to $25,000 PER BUYER, from an RRSP to purchase a home without having to pay tax on the withdrawal. The federal government recently increased the maximum amount to give additional access to their registered retirement savings plans (RRSP’s) for home purchases.
Remember, the $25,000 per buyer does not HAVE to be used solely for down payment – it
- Closing costs
- Paying off some debt
- Moving expenses
- or even a vacation to celebrate!
You qualify if:
- You or your spouse have not owned and occupied a home as your principal residence in the preceding 4 years, or
- You are buying or building a home for a disabled person who is related to you
For more information, visit http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
Government and Municipal Grants
This refers to some provinces and municipalities providing down payment assistance grants – a forgivable interest free lump sum amount to be used for the sole purpose of down payment to purchase a home. If a municipality decides to offer this program, it is built into their budget, and they allocate a certain dollar amount – once the total budgeted grant amount is used, the program ceases. This comes under the Canada Affordable Housing Program. So if you have a low or moderate income and fit the specific qualifying criteria, that can be very rigorous, then this could be a good fit. These vary in guidelines based on the province or municipality that is offering it and we recommend you enquire locally if there are any grants available.
Just to give you some more information, the guidelines that are set out by the government or municipality typically include provisions such as the following – although not exhaustive and subject to change:
- Property selected meets specific guidelines including limits on the maximum purchase price and dwelling style. For example, must be at or below the average market-selling price for the area and must not exceed what is affordable to households at the 50th percentile of income. Cannot be an income generating property so duplexes, triplexes are excluded etc. Must be of modest means. This is to ensure the program is not used to purchase larger homes that don’t meet the mandate of the program
- If you sell the home within a certain amount of years of purchase (usually 10 or even 20 years), you will be required to repay the original amount PLUS a percentage of the realized capital gains (so property price increase).
- You have to be currently renting
- Have low household income at or below the 50th percentile
- The down payment grant they provide you does not usually exceed 5% of the purchase price and has a specific dollar amount maximum depending on the municipalities budget e.g. 5% of the purchase price to a maximum of $15,000
Because availability and guidelines are constantly changing, we recommend that you search on Google using the references below to find out if one is available near you and the current criteria and qualifying:
- Down Payment Assistance Grants in (insert your town name)
- Municipal Grants in (insert your town name)
As specialists in this unique area of financing, we can walk you through the nuances of each type of mortgage available: We’ll explain the pro’s and con’s of each to ensure it is a good fit for you. Let us provide you with your mortgage options for your current and future goals. Even when the bank says ‘no’, we have access to lenders that offer lending solutions for hard to place mortgages.
Give us a call today for your free and confidential evaluation. (778) 760-2844