No Down Payment Mortgages

Written by Caitlin Wood

No Down Payment Mortgages

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Down Payment Mortgage Down Payment No Down Payment Zero Down Payment

The dreaded down payment often keeps young Canadians from being able to afford their first home for years and with the price of houses rising in many of the major cities, even 5% of the purchase price is typically a larger number than most people are comfortable with. So when you hear about the possibility of a no down payment mortgage, it’s completely understandable that you’ll definitely want to consider it as an option.

Here’s everything you need to know about the no down payment mortgage, to make the best choice for you and your finances.

Do No Down Payment Mortgages Really Exist? 

Purchasing a home with no down payment saved doesn’t mean that you don’t have to make a down payment; it simply means that you’re not using your own hard-earned and saved cash to pay for the down payment. It means you’re going to borrow your down payment (at least 5% in Canada), which in return means you’re taking on even more debt. This is why it’s important that you’re in good financial standing before you take on even more debt than is technically necessary.

How Does a No Down Payment Mortgage Work?

A no down payment mortgage works exactly the same as a regular mortgage expect no money is required at closing. The only cash you’ll need is the amount needed to cover the standard closing costs. Your mortgage and down payment will both be funded by a lender. However, the government doesn’t allow Canadians to borrow their down payment from their mortgage lender if their lender is a bank or federal trust company. As such, you’ll have to find an alternative lender instead for your down payment. Once you find an alternative lender and get the financing you need for a down payment, you simply make payments to your alternative lender, like you would the bank for your mortgage. 

Types of Loans You Can Use as a Down Payment

There are a few different ways you can get a down payment without having to save for it:

• Line of credit. You can opt for a line of credit for your down payment. But it cannot be from the same bank you’re getting your mortgage from.
• Personal Loan. This could potentially be a good option for someone who is in great financial standing but doesn’t want to wait any longer to purchase a house.
• Credit card. This is probably the worst option as charging at least 5% of the purchase price of your home could put you into credit card debt for years.
• Borrowing from a family member. If you have a generous family member then you could potentially borrow your down payment from them.
• Government programs. Depending on what province you live in there are special government programs that can provide lower-income families with down payment assistance.

Government Programs 

Pros and Cons of Borrowing For a Down Payment

Borrowing for a down payment has its advantages, however, just the same, it can come with a number of challenges as well. 

Pros

• No more renting – when you have to pay for a down payment, it can take a few years of saving before you have enough to buy a house. With borrowing, you can immediately start investing and grow equity in your home. Rather than wasting money on rent, each payment you make goes toward owning your home. 
• Avoid mortgage default insurance – When you make a down payment of less than 20%, you’re obligated to purchase mortgage default insurance (CMHC insurance) which can cost thousands of dollars. By borrowing the full 20%, you won’t have to add mortgage default insurance.
• Grow your wealth – A house is usually considered as one of the largest assets a person owns. The earlier you buy it, the more equity you can build, which helps grow your net worth. 

Cons

• Falling house prices – When you place a down payment of 20%, it typically protects you from owning more than what your house is worth, in the event house prices fall. 
• Lower Equity – If you’d like access to a HELOC, you won’t have enough equity as most lenders require your home to have at least 20% in equity. 
• Increased debt – If you borrow your down payment you’re taking on even more debt, this could potentially increase your monthly payments which can be extremely financially draining for years. Moreover,  it can affect your debt to service ratio which in turn can affect the amount you want to borrow for a mortgage. 
• Higher interest – The interest rates associated with borrowing your down payment can be very high, sometimes higher than the interest rate associated with your actual mortgage.
• Risks personal relations – If you borrow money for a down payment from family but are unable to pay it back in time or at all can easily burn bridges.

How Do You Improve Your Chances of Being Approved for a No Down Payment Mortgage? 

Being approved for a no down payment mortgage can be a challenge. However, there are a few factors you can work on to improve your chances of being approved. 

• Credit score – While each lender has its own set of criteria, generally, lenders will want you to have a good to excellent credit score. This means you’ll need a credit score of at least 650. In addition to that, you’ll want to make sure that you have no prior late or missed payments on any of your credit products within the last year or two. 
• Employment – There are three things a lender looks at when evaluating your employment. 
  • Income – How much money you make in comparison to how much you want to borrow.
  • Stability – How long have you had your job and how stable it is. 
  • Loss is income – If you were to have a drop in income would you still be able to make your payments. 
• Closing fees –  Closing costs are still required to be paid in cash. Typically it can cost 1% – 2% of your home purchase price. Thus, you’ll need to have that much cash in hand. 

Check out these hidden costs of buying a home. 

Should You Get a Mortgage With No Down Payment?

A no down payment mortgage sounds like a great idea, especially if you’re currently giving away a large chunk of your income to rent an apartment while trying to save so you can purchase your first home. But before you’re seduced by the idea you need to decide whether or not this financing option is the best strategy for you at this point in your life. There are a few conditions that should be met before you should consider a no down payment home loan:

• A stable income
• Above-average credit
• Being able to afford both a monthly mortgage payment and other life expenses
• Being able to financially handle a decrease or loss of income

If all of these conditions describe your current financial situation then a no down payment mortgage is, in fact, a good idea and you could potentially seriously benefit from it, just remember that while you might think you can handle it a lender still needs to decide whether or not they agree.

Unfortunately, if none of the above conditions describes you and your current financial situation then a no down payment mortgage is definitely not a good idea for you right now, we suggest you continue to save while rethinking your current spending and saving strategies.

Find out if you should buy or rent? 

The Bottom line

If you’re currently trying to save up for a down payment on a home and are having trouble with how long it’s taking then now is the time to look into the possibility of purchasing a house with no down payment. Deciding early on is a great idea as it will allow you to take your time and make all the necessary plans and take all the appropriate steps.

Just remember that purchasing a house without any cash on hand is a serious decision and that qualifying for a mortgage and another loan to cover your down payment doesn’t mean that it’s the best option for you, take your time and consider all scenarios before you take the plunge.