Tips to Get a Mortgage With No Down Payment

Tips to Get a Mortgage With No Down Payment

The difference between renting and buying a home for most people is saving for the down payment. Most monthly mortgage payments amount to similar costs as your monthly rent. Even modestly priced homes can seem unrealistic when you consider the traditional 20% down payment and various closing costs. If you are ready to take on the responsibility of owning a home but do not have enough for a down payment, there are a few options available.

But first, carefully consider the pros and cons of a low or zero-down payment mortgage.

A sizable down payment can save you money on interest charges by reducing the amount charged by your lender. A higher down payment shows your lender that you are a low-risk borrower. Just a one percent decrease in your interest rate can save you thousands in interest over your mortgage. A larger down payment also makes homeownership more affordable by merely reducing the amount of money you need to borrow, lowering your monthly fee.

It can be tempting to opt for no down payment if a sizeable chunk of your income is going towards rent anyway. Before you decide on this, be sure that you meet these conditions:

A stable income
Above-average credit
Afford both monthly mortgage payments and other living expenses
Be able to handle a financial emergency

If you meet all of these conditions, then a no down payment mortgage may be something you could benefit from. Keep in mind though that just because you think you can handle it, a lender may still not believe you can. If you do not meet these conditions, then you should continue to save and budget your finances better.

Purchasing a home with no down payment does not mean you do not have to make a down payment at all; it simply means you are borrowing the money from elsewhere. If you are a first-time buyer, you are required to put at least 5% down in Canada. Borrowing your down payment means you are taking on more debt on top of your mortgage, which is why it is so important that you be in good financial standing.

The Canadian government does not let home buyers borrow their down payment from their mortgage lender if the lender is a federal trust company or bank. There are other avenues you can take instead to borrow your down payment:

Line of Credit – Just not from the same financial institution as your mortgage
Personal Loan – This is a good option for people in good financial standing who do not want to wait longer to purchase a home
Credit Card – This is the most unfavourable option as it likely has the highest interest rate of other loans, which could put you in debt for years
Borrow from family – If you are close with family members that have more money saved, you could borrow from them with little to no interest
Government programs – Some provinces offer special government programs for lower-income families that need assistance with their down payment

Borrowing your down payment is essentially taking on more debt along with your mortgage. The interest rates on down payment loans tend to be quite high, sometimes even higher than the interest rate on your mortgage. Just because you get approved for a down payment loan and a mortgage does not necessarily mean this is the best option for you. It is important to consider all of your options when deciding on how you will finance a new home.

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