One of the biggest challenges most first-time home buyers in Barrie run into is saving a down payment. We are fortunate to have government backed default insurance in Canada. These programs provide security for potential lenders, allowing them to only require a 5% down payment from well-qualified applicants. While 5% does not seem like much to a lender, but for a young family or newly married couple this is usually a tremendous feat.
Although we’ve been through a few years of increasing mortgage regulations (decreased amortization, stricter debt servicing guidelines, etc.), there are still some options available to first-time home buyers who are struggling to save for their big purchase.
Cash Back Mortgage
New regulations brought in by the government in July 2012 blocked federally regulated lenders (banks & trust companies) from offering “no money down” or “cash back” mortgages (to be used as a down payment). These new rules do not impact provincially regulated credit unions. These institutions will still approve this type of mortgage for young individuals who have a solid career & good credit but lack the means to quickly accumulate a down payment. While this type of mortgage comes with a rate premium, with rates remaining low this strategy could be beneficial to the right applicant(s).
Gifted Down Payment
For those lucky enough, family can be a great source for a down payment. Recent mortgage regulations have left this option open, allowing direct family members to contribute to a client’s down payment (no repayment required). The whole down payment can be gifted but the applicant(s) would be responsible to accumulate 1.5% of the purchase price to be used for closing costs on the transaction. This is a great option, mainly because there is no rate premium to take advantage of this program.
There are a number of government agencies that have accumulated grant funding for qualified renters or first-time home buyers. Although these funds dry up very quickly after they are announced, none-the-less, they are periodically available. These funds will provide up to 10% of the down payment but there are normally a number of conditions tied to the approval, this can include a pro-rated repayment of the grant if the home is sold.
Although the rent-to-own option might be the least favourable (from an overall cost stand-point), for some applicants this might be the only option available. They may not qualify for the other outlined programs due to poor/non-existent credit history or issues with their current employment. A rent-to-own contract is normally set for three years. It is very important that the broker council the applicant throughout the term of the contract to ensure that they’ll be in a position to qualify for a mortgage and have the down payment funds to purchase the property from the investor when the contract expires.
It is best to sit down with a mortgage broker to determine which option would work best for your situation. Once your plan is in place, good luck house hunting!
Darren Robinson is a Barrie mortgage broker, dedicated to offering the best mortgage strategies and provides personal assistance to help people qualify for difficult mortgages and loans. Call 705.737.6161