Mortgage Down Payments
When it comes to purchasing a home, it isn’t specified anywhere that the down payment must come from your bank account. While it may come as an additional cost and can be more difficult to get approved for, you can actually borrow your down payment. That being said, whether you are purchasing the home for yourself or as an investment property can make a big difference. If you are purchasing the home as your primary residence, you have a few more options.
Borrowing Money for an Investment Purchase
If you borrow money for investment purposes, keep in mind that the process will be a little different. This is because, even if it is your first purchase, you are not going to live in the home. If you don’t intend to live in the home for at least a year after purchasing, then there are certain things you are not eligible for, such as the RRSP home buyers program, some down payment assistance programs, and a reduced down payment.
As we mentioned, in Canada, as a first-time home buyer, you can reduce your down payment to as little as 5% of the purchase price. That being said, you cannot do this if you are purchasing the home as an investment property. You must live in the home for the first year after purchase to qualify for this. The minimum down payment required for an investment property is 20%.
If you are choosing to borrow for an investment property,y then you would be eligible to use the following options:
- Personal Loan
- Line of Credit
- Credit Card
- Loan from Family
If you already own a home and are looking to purchase a second property, another option is a home equity line of credit (HELOC). You could also use a home equity loan; how these work is that you can borrow money from the equity in your current home, minus any amounts you still owe on the mortgage. This tends to have a much lower interest rate than other loans, but it is also riskier. This means that the down payment is now a secured loan against another property, and if you default on these payments, you may lose your home.
Is a Down Payment Required for a Vehicle Purchase?
Whether or not a down payment is required for a vehicle purchase is ultimately up to the lender. Most lenders will require 10%-20% of the purchase price as a down payment, but depending on your credit score, they may waive the down payment altogether.
If you do put a down payment on a vehicle, it isn’t necessarily a bad idea. Not only will it reduce your monthly payments, but it will also reduce the amount of interest that you will need to pay on that purchase. Because down payments tend to be much lower on a car purchase since the value is lower, it can be easier to borrow.
If you are looking for some way to borrow a car down payment, there are plenty of options available to you. You can go for a personal loan, line of credit or even a credit card. While these options may cost more in interest than the car loan, they can all be paid off relatively quickly.
Ways to Borrow Your Down Payment
When it comes to borrowing money for your down payment, you actually do have a few different options. Some of these options are better than others, though. It is important to keep in mind that even though you don’t have to come up with the down payment up front, you now have to pay interest on the money you are borrowing. This means you should pay close attention to what those costs will be; they will also affect your total mortgage approval amount
Personal Loan
The first option with the lowest interest rate is a personal loan. Personal loans are often very flexible, and you can make the payments on the same schedule as your mortgage. They are more structured and usually can be paid off in 3-5 years. A lot of personal loans are also open loans, meaning that you can put extra money on them whenever you have it and can pay them off early.
Line of Credit
Another way you could borrow money for your down payment is with a line of credit. Lines of credit work a little differently than personal loans. They are a form of revolving credit, meaning only the interest is required to be paid, and you can pay off and use up to the credit limit as much as you please. That said, lines of credit tend to have slightly higher interest rates than personal loans. They also normally have variable interest rates. This means that the interest rate changes with the prime rate. Another thing to consider about lines of credit is that they don’t require a principal payment, so you can end up leaving them and paying more interest over time.
Credit Card
Using a credit card for a down payment carries the highest interest rate among the options. Not only that, if you don’t repay the cash advance within 30 days, you have to start paying an extremely high interest rate. Cash advance rates are usually higher than the standard 20% used for regular transactions.
Money From Family
A way to avoid interest when borrowing a down payment is to borrow money from family. In some cases, family members will just give the money. Either way, the lender may ask for a letter explaining the source of the down payment funds so it doesn’t seem like they appeared out of thin air. Even when it comes to having your own down payment, lenders require proof that the money has been sitting in your account for at least 3 months. They even like to see the transactions of you putting the money into savings.
RRSP Contributions
While this isn’t necessarily a no-down-payment solution, using your RRSP contributions to purchase your first home is a great way to avoid the interest rates from borrowing a down payment. This is called the Home Buyers’ Plan. This plan lets you borrow up to $35,000 from your own savings in your RRPs for your first home purchase. There is no penalty for withdrawing this money, and you have up to 15 years to repay the funds. Repayment won’t start until the second year after you withdraw the funds.
To qualify for the Home Buyers’ Program, you must:
- Be a first-time home buyer
- Be a Canadian Resident
- Make the home your principal residence within a year of the purchase
- Sign an agreement on a qualifying home purchase (your house deposit does not have to be made yet, though)
If you have met all of these requirements, then you can take the money out of your RRSP penalty-free. It is actually a relatively simple process, and you are using your own money to fund the down payment. When you repay the funds, your repayment period starts. You are given a minimum amount due each year, and it is all paid when you file your yearly tax return.
Down Payment Assistance Programs
Depending on where you live in Canada, there are several provinces that offer some form of down payment assistance. There is also a federal program called the First-Time Home Buyer Incentive. This program allows Canadians to purchase a home by offering certain Canadians 5-10% of the purchase price, providing a larger down payment. This amount must be repaid, but it is much less than the interest on a loan.
This incentive is for first-time homebuyers only and is considered a shared-equity amount. How much you give back in equity will depend on when you repay. Currently, if the home appreciates,n the government’s portion is up to 8% per year. With depreciation, it will go down to 8% per year.
To qualify, you must make less than $120,000 per year ($150,000 in more populated areas like Toronto or Vancouver). You must also qualify for mortgage default insurance from the CMHC (Canada Mortgage and Housing Corporation). The CMHC is Canada’s equivalent to the Federal Housing Administration in the US.
Credit Score Needed to Borrow a Down Payment
If you are considering borrowing money from a financial institution for a down payment, the higher your credit score, the better. Not only do you have to be sure you can get the down payment, but you also have to be sure you can get approved for the mortgage.
To get a loan, most lenders prefer a credit score of at least 620. If you can get a credit score between 680 and 700, you are likely to get a much better interest rate. If you can raise your score above that, you are likely to qualify for a great interest rate. That being said, you still need to qualify for the mortgage.
To qualify for a mortgage in Canada, if your down payment is less than 20%, you need to obtain CMHC mortgage default insurance. This protects the mortgage lender if you default on your payments. To qualify for this insurance, the CMHC requires that you have a credit score no lower than 600. For this reason, to get a down payment loan, it is recommended to have a credit score of around 700, but no lower than 600.
If you’re unsure where your credit score is, you can easily check it for free. You can check your Equifax score with Borrowell and your TransUnion score with ClearScore.
CTA: Are you looking for a mortgage? Well, Spring Financial can help. Apply online, and you can work with one of our licensed agents to get access to some of the best mortgage rates. You can also chat with an agent online or call us at 1-877-393-1516.
Prerequisites for Getting a Down Payment Loan
When you are looking for a loan for your down payment, you are going to need some of the same things that you would need to get a mortgage.
Proof of employment: This will be either a letter of employment from your employer or 2 of your most recent pay stubs. In some cases, both may be required.
Credit Check: This will show the lender your credit score, credit history, and debt-to-income ratio. Your DTI should be relatively low if you are looking for a down payment loan because your total DTI (with loan payments, mortgage payments and all other debt) should be no more than 40% of your monthly income. This gives lenders more confidence that you will make your payments on time while covering your bills and other housing costs.
Copy of ID: This is usually a government ID, such as a driver’s license or passport. In most places in Canada, a personal health card isn’t accepted.
Bank Statements: You are required to have a bank account to obtain financing in Canada. Lenders usually require no less than 90 days of bank statements to prove you have a bank account, verify your income and show that your account is active.
If you don’t choose to go this direction, then the process is a little different. For government assistance programs, you would have to apply for approval for those. Taking money from your RRSP requires a form that you must sign and bring to the bank. If you are getting a loan or receiving money from an immediate family member, you would need to speak with your lender about what they require as proof for the loan or gift. This is usually just a gift letter or something equivalent.
Should You Borrow Your Down Payment?
In reality, whether you should borrow for your down payment depends on you and what you can realistically afford. Suppose you can use one of the options that doesn’t require any interest payments; great. If you can’t, then you should ask yourself some questions.
Does it make sense to borrow a down payment? How long would it take you to come up with the money without borrowing it? Can you realistically afford it? You should also consider your living options. Does this give you the best place to live? How do the mortgage payments and loan payments relate to what your rent payments would be? If you have thought it over, considered your finances, and it seems to be the best option for yo,u, then it can be a great way to stop making rent payments and start building equity.
Checking Your Credit Score Before You Apply
Before you apply for a new credit line at any time, it’s always a good idea to know where your credit score sits. With Borrowell, you can keep up to date on your Equifax score, while you can use ClearScore to keep up to date with your TransUnion score.
