Borrowed & Zero Down Mortgage
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It can be challenging to save up enough money for a down payment of 5% or more, especially for first-timers. A Borrowed down payment mortgage lets you pull from a credit source for your down payment in order to let you purchase your home quicker.
This is what we nowadays commonly call a "Zero Down Mortgage" as it is zero cash out of your pocket when you utilize a borrowed source.
A credit source can be a:
- Credit card
- Personal line of credit
- Personal loan
Here’s what you as the prospective buyers need to know about this mortgage program:
- You can get the very best rates in the market for your mortgage!
- You’ll need excellent credit: the ideal candidate has a 680 Score or higher..
- Borrowed down is considered a riskier product so lenders are also looking to see the stability in your employment to show that you can afford your new home plus the new payment on the borrowed funds plus any other debts you already pay for. If your overall debts/affordability are too high including all of the new and present debts lenders and insurers might decline the borrowed down payment scenario.
- You’ll pay a bit more for mortgage default insurance. Because borrowed down is considered a higher risk loan than one with a traditional saved down payment, mortgage default insurance (CMHC) premiums are slightly higher than normal ones when your down pmt is saved.
- These fees are added into the mortgage and are not an out of pocket expense for you upfront. This fee is a 1 time fee charged when you buy your home and covers you for the life of your mortgage.
- Example: $350,000 - 5% down payment = $17,500.
- With the lower insurance premium of 4.0% for a standard down payment (saved, gifted etc) the insurance would be $13,300
- With a borrowed down payment the premium at 4.5% would be $14,962.50. It’s not a huge difference when we are looking at that amount over 25 years, so the real question is always whether the purchaser qualifies for a borrowed down mortgage and if they want to borrow those funds to be a home owner sooner.
- PRO TIP: When considering this type of mortgage strategy one major thing I focus on with all clients is your common sense day to day budgets. Sometimes it does make sense, if we know the funds borrowed are affordable and can be paid off in a reasonable amount of time. Sometimes taking on a new mortgage pmt, new debt payments plus higher overall utility bills and insurance costs can overwhelm buyers where this will drown them. Those scenarios are not worth it as we don't want to have your home buying experience followed by a consistent feeling of being house poor and in debt.
