Owning a house is a significant milestone but requires a substantial financial commitment! One of the essential requirements when buying a home is having a down payment towards the purchase price. While many people need help saving enough money for a down payment, recent changes in mortgage rules have made it more challenging to buy a home without a down payment.
What does It take to Buy a Home?
To buy a house, you must have access to a down payment which may be borrowed, or it can also be your own money, either saved up over time or given to you as a gift by a relative. The size of the down payment you have determines the size of your mortgage.
Nowadays, lenders require a minimum down payment of 5% on the first $500,000 purchase price and an additional 10% for anything over $500,000. For instance, if the purchase price is $600,000, you will need a total down payment of $35,000, which includes 5% of $500,000 ($25,000) and 10% of the remaining $100,000 ($10,000).
In addition to the down payment, lenders will require proof that you have enough money to cover the closing costs. These costs include legal fees, land transfer taxes, PST on the mortgage insurance premium, property tax advance payment, utility hookups, and moving expenses. Typically, lenders will require an additional 1.5% of the purchase price to cover these costs.
What are my other sources of Down Payment?
1. Personal Savings!
There are several sources of a down payment. Your savings can be invested in savings accounts, GIC, mutual funds, or TFSA. As long as you can access the funds before the closing date, they can be used as a down payment.
2. The RRSP
Another source of a down payment is your RRSP. If you have accumulated funds in your RRSP, you can withdraw up to $35,000 (per person) to use as a down payment for your home. The money must have been inside your RRSP for at least 90 days, and you have up to fifteen years to return the withdrawn amount to your RRSP without any tax consequences.
With the high cost of homeownership, many young people turn to their relatives for help with their first down payment. A gift from a relative is also an acceptable source of a down payment. Lenders allow this as long as both you and your relative sign a one-page gift letter stating that the money is a gift and not a loan.
4. Borrowing is an option!
While borrowing money for a down payment is not recommended, it is still an option for some people. However, the days of using a personal line of credit for a down payment are long gone. Today, lenders have more sophisticated computer systems and underwriting processes that can detect such activities. Besides, borrowing for a down payment can lead to financial stress and increase your overall debt burden.
New mortgage rules have made it difficult to buy without a down payment. Furthermore, purchasing a home without a down payment can lead to a higher monthly mortgage payment, which can strain your finances. It is always advisable to save for a down payment or seek assistance from a trusted relative.
In conclusion, while trying to buy a home with no down payment may be tempting, it is not recommended. Lenders require a down payment for a reason – it reduces their risk and ensures that the borrower has a vested interest in the property.
Several sources of down payment funds are available, including personal savings, RRSPs, and gifts from relatives. However, borrowing a down payment is not advisable, as it can lead to significant consequences if the lender or mortgage insurer discovers the activity.
Ultimately, saving up for a down payment is a wise financial decision that can set you up for success as a homeowner in the long run!