No Down Payment Home Loans - Non-Traditional Down Payment



One of the strategies to arrange no down payment home loans is to choose utilize the "non-traditional down payment".

Alright, what is a "non-traditional down payment"?

According to CMHC, a non-traditional down payment can be any of the following:

  • borrowed funds
  • gifts
  • 100% sweat equity
  • lender cash back incentives

Here, I am specifically referring to borrowed funds. If you want more information about lender cash back incentives visit No Down Payment Mortgage Loans for this strategy.

Sally and her boyfriend Chris purchased a home for $350,000.00 in December of 2010. They hadnít saved the 5% down and considered borrowing the funds required to finance their purchase.

No Down Payment Home Loans

Sally had gone to her bank to get qualified for this purchase. Sallyís banker told her no down payment home loans were not available. Sally was told that she needed to have saved at least 5% down to purchase a home and couldn't borrow the down payment!

Chris had met with his brotherís mortgage broker. The broker explained that there are still a couple of lenders in Canada that will help clients arrange no down payment home loans. These lenders are not allowed to finance 100% equity mortgage loans but they utilize the "non-traditional down payment" program available that is available.

This program is made available through the high ratio insurers. In this case Chris & Sally borrow the down payment from a bank, provided they have positive net worth and qualify for the loan. The funds from the loan are then used toward the purchase of their first home.

The lenders that allow this consider the down payment loan as a ìnon-traditionalî down payment. There is a slightly higher premium of 0.15% added to the high ratio premium for mortgages under this program.

The mortgage broker explained that Sally and Chris have to meet 2 main criteria to qualify:

  • Good credit (a minimum beacon score of 650 is required)
  • Have enough savings to cover the closing costs (calculated as 1.5% of the purchase price)

The 1.5% calculation for closing costs is an estimate of actual costs. Examples of some of the closing costs would include:

  • Legal Fees ($1000 - $1500)
  • Title Insurance Fees ($300)
  • Moving costs (case of beer & pizza, utility set up fees)
  • Land Transfer Taxes (if applicable, in the province they purchase their home)

Sally and Chris met these criteria and proceeded with the financing.

This strategy isn't for everyone and not everyone qualifies, or can afford to do this!

As you can see from the image above, Chris & Sally borrowed the funds required for the down payment. The interest rate they paid for the down payment loan was 6%, higher than the mortgage rate, and monthly payments were $338/mth.

At the end of 5 years, the loan was paid out and they had also paid down their mortgage principle substantially!

There are 2 main advantages to this strategy over the Cash Back Strategy:

  • Chris & Sally can choose any term and therefore choose a low interest rate for the mortgage
  • Principle reduction with the lower rate vs. the cash back is significant!

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