YOU CAN BUY A HOUSE WITH NO MONEY DOWN
If you have a good job and want to buy a first home, but don't have a down payment, can it be done? The answer is maybe and depends on how you want to answer question.
How is your credit score? In order to qualify for a mortgage you must have a good credit rating. Try to reduce or eliminate all outstanding credit card debt first. Cancel credit cards you are not using.
Do not change jobs just before applying for a mortgage. The lender will want to see that you have a stable employment history. You can go to Equifax.ca to obtain a free copy of your credit score. If any information in your credit file is incorrect, take the time to get it fixed before applying for any mortgage loan.
Do you qualify for an insured mortgage? With an insured mortgage, you are able to finance up to 95% of the purchase price, either through CMHC or a private mortgage insurer. You will need to have at least the remaining 5% down payment, as well as approximately an additional 1.5% to cover the land transfer tax, legal fees, moving and other closing fees.
You may also want to set some more money aside to do some work on your new home before you move in. To obtain the insured mortgage, you will have to demonstrate that you have enough monthly household income to pay your mortgage as well as your household expenses. It is a good idea to try and get a pre-approval for your mortgage, so you know before looking how much you can afford, based on the down payment that you have.
Is a mortgage with no down payment possible? Some lenders offer qualified buyers the entire down payment on the day of closing, if the buyer has good credit, stable employment and qualifies for the lenders closed mortgage rate over 5 years.
The disadvantage with these mortgages are that if you want to discharge them early, you will have to pay back a prop-rated portion of the money received. You will probably be paying 3% more interest on a monthly basis than you would if you were using a variable rate mortgage, which is popular today among most home buyers.
This extra interest will amount to more than the imputed value of the down payment over a five year period, yet it will be offset by the fact that you get to close your purchase now, with a down payment which you currently don't have. Other lenders offer similar "cash back" mortgages, which may cover your 1.5% closing cost or more, on similar terms and conditions.
What about the agents commission? Most buyers use a real estate agent to find the right home and negotiate the best price. The provide advice on how to handle a bidding war, make sure your home is professionally inspected, and arrange the proper insurance. They may introduce you to a mortgage lender. Most buyer agents will try to obtain their commission form the seller. But if the seller refuses to pay them, it is expected that the buyer will pay the agent.
Let's say the buyer agrees to pay their agent 2.5% commission for their efforts. The agent finds a house and the buyer wishes to pay $400,000 with the understanding that the seller will pay the agent 2.5% commission, or $10,000 + HST
Now let's say the seller refuses to pay the commission. The buyer will then offer $390,000 to the seller and will pay the agent directly. The difficulty with this example is if you are a buyer with very little down payment, you do not have the extra $10,000 + HST to pay the agent.
CMHC has indicated that in the above example they will only finance the commission if it is included in the $400,000 sale price. This to me is wrong and needs to be changed. CMHC should permit a buyer such as the one in our example who pays $390,000 plus $10,000 directly to the buyer agent, to be able to finance the entire amount with an insured mortgage.
Hopefully, this will change, once CMHC sees the impact of all the recent changes to the real estate brokerage models as a result of the settlement between the Competition Bureau and the Canadian Real Estate Association.
Until that happens, buyers need to be upfront and honest with their real estate agents. If you know you don't have the money to pay the buyer agent yourself, as in the above example, explain to the agent that every offer you submit must be on the understanding that the seller will be paying the commission directly.
Other stuff. If you are contemplating a home with a basement apartment to help you carry your expenses, be sure to ensure that the unit has legal zoning and complies with the local fire code. In addition, make sure you notify your insurance company about this.
Finally, always have a professional home inspection done. You do not want to find, after closing, that the requires repairs that you can't afford.
Even if you have a low down payment, by being properly prepared, you dream of ownership can come true in 2011.
Article written by Mark Weisleder, real estate lawyer. Appears January 7th, 2011 Toronto Star
