January 16, 2013
100% financing has disappeared.
Or has it?
100% Financing has not been around since 2008. This is where you purchase a home with no money down at all. Since then, some Lenders had offered a product at a higher rate that allowed you to purchase a home at 5% down, using a 5% cashback from the Lender as the Down Payment. Currently, only Credit Unions are allowed to offer this option.
Now even that has disappeared, replaced with the ‘Alternative Source Down Payment” product. This incarnation allows you to borrow the funds required for the down payment. Sources may include a Line of Credit, personal loan, or even a credit card. Guidelines are very strict on this however, and the Lender must make sure you can handle the increased debt payment.
First Time Home Buyers can use RRSP funds towards their down payment up to $25,000. You would be borrowing from your retirement savings, and wouldn’t have to start paying them back until the 2nd year after the year you pull out the funds. The payments you will have to make to your RRSP are not included in the Lenders calculations, which could come back to bite you if you don’t budget for them yourself. You would also risk losing years of tax-deferred investment gains, and any payments to be made that are missed or are short are taxed as income for that year.
Another alternative, if you have a generous relative, is to have the down payment amount ‘gifted’ to you. This means that you are given funds, usually required to be from a blood relative, that do not have to be repaid, with all parties involved required to sign a document stating this.
The main problem with these options is that they can leave you vulnerable if home prices fall and you need to sell. The decrease in the maximum allowed Loan-to-Value for a refinance (now at 80%) is also something to keep in mind when purchasing with 5% down, whether using borrowed or gifted funds to do so.
Purchasing a home using borrowed or gifted funds is a decision that needs your full attention, if you are considering it.
You may find yourself unable to successfully hold the loan you have qualified for. Do your homework!