No money down mortgage allows home buyers to purchase property with no money required at closing, except standard closing costs.
Real estate prices are pretty high everywhere, but those prices are higher than anywhere ever in Canada. Mortgage in Canada is not just an option, and it is the only option most of the time. In addition to the long-term nature of the mortgage, millennials in Canada face another major challenge – the down payment.
The minimum down payment in Canada is 5% of the purchase price. Since property prices are exceptionally high and continue to rise year after year, the initial contribution is also very costly, which puts the young generation in Canada in great financial difficulty.
Of course, if there is a chance to get a mortgage that does not require initial payments, most people would take it. Here is a little guide on how to take a mortgage in Canada, avoiding the necessity to pay a down payment.
No money down mortgage: Is it possible?
The short answer to this question is – no. Every mortgage requires an initial contribution, which is an unavoidable fact in Canada. In 2008, after the mortgage crisis in the US, the government in Canada made 0% down mortgages illegal.
If you don’t have the money on hand (which is a rare situation), your only option is to borrow the money for the down payment. This method is risky and difficult to execute, as it requires a good financial standing and a credit score above 700.
How does the whole thing of getting a no money down mortgage work?
Once you find an alternative lender who will allow you to finance the down payment, you are required to make payments to both institutions – the bank you are mortgaging with AND the new lender.
Where do you get the money:
Once you decide to borrow money to cover expenses on the initial payment, you should decide where to take it. There are few possible options:
- Get a personal loan – this might be a good idea if you know someone with a stable financial situation who can provide you with money at the moment;
- Get a loan from a bank or financial institution – you can land money if you can boast a good credit history. The disadvantages of this method are the high-interest rate and the fact that you cannot borrow money from the same bank where you took the mortgage;
- Love money (from a family member) – seems to be a perfect option for a person who has wealthy and generous family members who could lend you money without charging interest;
- Use your credit card – this would be one of the worst options as you would be obligated to pay the money back with extremely high-interest rates;
- Apply for a government program – the government sets up various special programs to help support low-income families by paying an initial contribution.
Advantages and disadvantages of borrowing a down payment
There may be many reasons you are looking for a way to get a no money down mortgage. But before you decide to do so, you should properly weigh the pros and cons.
- You save money on insurance. You are required by law to purchase CMHC insurance if you have made an initial payment of less than 20% of the price of the entire property. The problem is that this type of insurance is very expensive. You can avoid the additional cost by borrowing the required amount from a lender for a 0 down payment mortgage.
- You can rent out your home as an investment property. You may have to wait years to buy a home if you don’t have the funds for a mortgage down payment in Ontario. You can start investing immediately and create equity in your property if you get a loan for a first payment.
- You will start accumulating assets. Whether it’s your first house or investment — it’s always better to have a house than, well, NOT have it.
- Risky activity. The first reason you should avoid this method is that you are putting yourself in a situation where you have a lot of debt without an equity buffer;
- Lower equity. Your HELOC application could be denied if you do not have enough equity (you should have at least 20% equity);
- Home prices tend to go down. If you put down a 20% down payment, you are usually protected from owning more than your home is worth if property prices fall;
- Higher CMCH insurance premiums. Insurers are very likely to charge a 50% premium surcharge on premiums for a mortgage with a borrowed down payment;
- You risk ruining your relationship with a close person. If you borrow money from a close friend or relative, you risk ruining your relationship with that person in the event of financial problems.
How to overcome the challenge of a mortgage approval with no initial contributions?
You know the pros and cons, and if you’re still here — you’re not scared. Now let’s talk about the process. Getting approved for a no money down payment mortgage can become a difficult challenge, but some lifehacks can improve your chances of getting approved.
- Work on your credit history. Lenders are very reluctant to lend money to people with poor credit. Each lender sets its criteria, but you must generally have a credit score of at least 650. Also, make sure you do not miss any payments on your mortgage;
- Have a good job. Sounds simple, huh? Unfortunately, it’s a very important step, and there should be no illusions. Generally, lenders evaluate three things when they take a look at your employment: the amount of annual income, financial stability, and financial ability in the event of a loss of income;
- Keep closing fees in mind. Typically, they are charged at 1% – 2% of the purchase price and must be paid in cash.
The heart of the matter
There may be many reasons why you missed the chance to put aside the required amount. Perhaps, you haven’t had time to save for an advance payment, or something has happened that depleted your savings in a very short time. Things happen, and sometimes you can’t control them.
The idea of buying a house with borrowing a no down payment can work in Canada. Suppose this idea sounds tempting to you, especially if you have to spend a significant amount of money each month for rent, and you understand that the idea of putting something aside for the future may delay the realization of your dream of a new home for years. In that case, you should give it a try.
However, be careful and make sure that you have assessed all the risks before committing to the idea. You should be sure that implementing this method is the best financial strategy for you right now and will not plunge you into huge debt.
Pay attention to the most important conditions:
- You should have a stable income. Reality is hard, but you definitely should;
- You should be able to combine payments for the mortgage and a lender for the down payment;
- You should be clear about your financial options in case of losing an income source.
If you’re honest with yourself, and you know that you CAN afford it — go for it. Otherwise, prioritize your savings account growth, and don’t take any financial risks (unless they’re truly necessary).