Tips on How to Buy a House With No Money Down
We explain how a zero down payment works and provide some strategies for buying your first home with a low income and with no money down.
By Emily Southey | 12 minute read
Curious about whether you can buy a home with no money down? We feel you. If you don’t have enough money saved up, then the thought of buying a home with no down payment likely appeals to you. Luckily, it’s possible to buy a home without needing the upfront funds for a down payment.
Can You Get a Mortgage Without a Down Payment?
Yes and no. The reality is that you cannot be approved for a mortgage without making a down payment. However, no rule says that the funds for your down payment must come from your personal savings account. Rather, you can fund your down payment with a loan, by borrowing the down payment amount in addition to the mortgage loan. Therefore, technically, you can buy a house without putting any of your own money down.
It’s worth noting that before the 2008 financial crisis, mortgage lenders could offer true zero down payment mortgages to borrowers. But the crisis led to stiffer regulations, especially on mortgages, which eliminated zero down payments as we knew them. Since then, borrowers have been required to submit down payments in order to obtain mortgage loans. However, as mentioned, these mortgage payments can be funded with a loan.
Further, some lenders have started offering insured mortgages with lower down payments than conventional mortgages. So although not quite as appealing as a zero down payment, it might still be low enough to ease the financial burden of buying your first home.
The Consequences of a Zero Down Payment
Before buying a house with no money down, it’s important to consider the consequences of doing so. We’ve made a list of some of them below.
The main disadvantage of buying a home with a zero down payment is that it leaves you with a large amount of debt. You will have debt on the loan or line of credit you took out to fund the down payment, as well as loan payments to make for your mortgage. This can be stressful to manage. Therefore, if you’re considering buying a house with no money down, we recommend speaking with a financial planner to make sure you have a plan to make all your necessary payments on time.
Little Home Equity
Buying a home with no money down translates to little home equity. Home equity is the difference between the amount you’ve paid on your home and the amount you have left to pay. For example, if you took out a $500,000 mortgage, paid a $100,000 down payment, and have so far paid $50,000, you have $150,000 worth of home equity. So if you were to sell your home for $500,000, you would get $150,000 cash. But without this down payment, there is no foundation of home equity, leaving you with very little if you were to sell your home tomorrow.
Mortgage Insurance Payments
A third consequence of purchasing a house with no money down is that you will likely be required to purchase mortgage default insurance. Mortgage loan insurance is typically required for borrowers who made a down payment of less than 20%. Mortgage insurance rates vary but can be anywhere from 0.6% to 4.5% of your mortgage, and are usually on the higher end if you bought a house with no money down. You will be responsible for making these mortgage insurance payments until you’ve paid off 20% of your mortgage. It’s important to note that mortgage loan insurance does not protect you, the borrower. Rather, it safeguards the lender against financial loss if you are unable to pay your mortgage.
“The reality is that you cannot be approved for a mortgage without making a down payment. However, no rule says that the funds for your down payment must come from your personal savings account.”
Tips for Buying a House with No Down Payment
As mentioned above, there is no such thing as buying a house without a down payment. However, there is a way to make a down payment without dipping into your personal savings, and that’s by funding your down payment through a loan. So if you’re still interested in buying a house with no down payment, follow the tips below!
Use Your RRSP Savings as a Down Payment
Our first tip for buying a house with no down payment is to use your RRSP. The Government of Canada introduced the Home Buyers’ Plan. Under the Home Buyers’ Plan, eligible first-time homebuyers can withdraw up to $35,000 in RRSP savings tax-free, which can then be put toward a down payment. Buyers have 15 years to pay back the withdrawn funds. To be eligible for the Home Buyers’ Plan, you must meet the following criteria:
- The RRSP funds you borrow must have been in your account for a minimum of 90 days before withdrawal;
- You cannot have owned a home in the last four years;
- If you’re buying a home with a spouse or common-law partner who is not a first-time homebuyer, you cannot have lived in a house that they owned for more than four years;
- You must have entered into a written agreement to buy or build a qualifying home;
- You must plan to live in the home you purchase within one year of buying it and it must be your primary residence;
- If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due;
- You must withdraw the money from your RRSP within 30 days of taking title of the property; and
- You must be a Canadian resident.
The Borrowed Down Payment Program
Another way to fund your down payment is through the Borrowed Down Payment Program. This program is exclusively available to homebuyers who have an excellent credit history but don’t have enough money in savings to buy a home. The Borrowed Down Payment Program lets you borrow your entire down payment amount. In essence, it allows homebuyers to borrow both the mortgage money (up to 95% of the home value from a traditional mortgage lender) and the down payment money as a personal loan from a different source. When you combine the two, buyers will have enough money to fund the purchase of their new home, including the down payment, creating a zero down mortgage. That said, the program has strict qualifying criteria, which are as follows:
- You must have a credit score of 680 or higher (750 is recommended);
- You have a stable income (if you are not on salary or have guaranteed hours, then you have been with the same employer(s) for at least two years);
- You are buying a house that does not cost more than four times your gross annual household taxable income;
- The purchase price of your home is roughly $500,000 or less.
The Shared Equity Interest Program
One final way that Canadian homebuyers might be able to buy a house with little money down is by taking advantage of the Shared Equity Interest Program. The Government of Canada’s Shared Equity Interest Program is aimed at first-time homebuyers. If approved, a homebuyer is granted an interest-free shared equity loan for up to 10% of the purchase price of the new home (or 5% of the purchase price of a resale home). This 10% loan can then be used to make a larger down payment. (A 5% down payment is required to be eligible for the program, which means you would need to have saved up enough to put down 5%. But if you can do that, the 10% loan offered through the Shared Equity Interest Program could allow you to put down up to 15%). With this type of loan, the Canadian government effectively becomes a part-owner of your home, owning a 5% or 10% share of your property. When you eventually sell your home, you must pay back the amount borrowed plus 5% of the property’s appreciated value. Through the Shared Equity Interest Program, homebuyers have 25 years to repay the loan or until the home is sold, whichever comes sooner. To be eligible for the program, you must meet the following criteria:
- Your total household income cannot be more than $120,000;
- The property you purchase must be worth four times your household income; and
- You must have paid a minimum down payment of 5%.
How to Buy a House with Low Income in Canada
If you want to learn more about zero down payments because your income is low, we’ve put together a few other tips to help you buy a home with minimal savings.
Improve your credit score
Your credit score directly affects your ability to get a mortgage. For this reason, the first step to buying a house with low income is to boost your credit score. Having a good or excellent credit score opens up a world of opportunities, including improving your odds of being approved for a mortgage. (In contrast, buying a house with bad credit can be challenging and expensive, possibly requiring you to take out a high-risk loan from a subprime or private lender). To boost your credit score, pay all bills on time and in full, pay off any and all debt that is feasible, and keep your credit utilization ratio under 30%.
Pay off as much debt as possible
Your debt levels matter when it comes to obtaining a mortgage. The more debt you have, the riskier you are to a mortgage lender, and the higher the interest rate will be. Therefore, before getting pre-approved for a mortgage, try to reduce your debt-to-income ratio by paying off as much debt as possible.
Ask a family member for help
If you don’t have enough savings for a down payment and are hesitant to take out another loan, consider asking a close family member for help. Parents who have paid off their current homes might be in a position to help their adult children with a down payment.
Get a co-signer
If you don’t have enough money for a down payment and are having trouble getting approved for a mortgage due to your low-income status, consider finding a co-signer. Co-signers reduce a borrower’s risk since if the borrower defaults on their mortgage payments, the co-signer is required to step in. If you decide to find a co-signer, be sure to set clear expectations.
Take advantage of homebuyer incentives
One last tip for buying a home with low income is to take advantage of homebuyer incentives and assistance programs. The federal, provincial, and municipal governments of Canada offer a wide range of programs designed to help first-time homebuyers purchase homes. Research these programs and apply for them all. Some of the most popular homebuyer incentives in Canada include the Home Buyers’ Tax Credit, the Home Buyers’ Plan, the Ontario First-Time Home Buyer Incentive, and the Toronto First-Time Home Buyer Incentive.
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Frequently Asked Questions
How Does a Down Payment Work in Canada?
When you buy a home in Canada, you are required to make a down payment. The down payment is the amount of money that a homebuyer must pay upfront when they purchase a home. The down payment can be funded through a number of sources, such as from the buyer’s personal savings or through a loan. The down payment amount is then deducted from the total mortgage price of your home. Down payment requirements vary according to the purchase price. Requirements are as follows:
- 5% for homes priced at $500,000 or less;
- 5% on the first $500,000 and 10% on the remaining balance for homes priced between $500,000 and $1,000,000; and
- 20% for homes priced at $1,000,000 or more.
Do Mortgages With No Down Payment Even Exist?
Yes, mortgages with no down payments do exist. However, they aren’t as straightforward as they sound. Making a down payment when you buy a home in Canada is required by law. However, the law doesn’t stipulate that you must fund the down payment with your own money. Therefore, a mortgage without a down payment is possible because you can make a down payment with borrowed money. This borrowed money might come from a line of credit or a loan. Typically, it involves acquiring more debt. But if you don’t have enough savings to make a down payment on your own, this might be your best option.
What Are the Pros and Cons of a No Down Payment Mortgage?
The pros of a no down payment mortgage are as follows:
You get out of the rental market: Perhaps the biggest perk of a no down payment mortgage is that it allows prospective buyers with little savings to enter the housing market. Even though you will acquire more debt with a zero down payment mortgage, it might be better than continuing to spend your money on rent. When you’re renting, you’re simply losing money. But if you purchase your own home, your monthly payments go toward building equity.
Your net worth increases: Think of real estate as an investment. The sooner you start owning assets, the sooner you will have equity. This equity allows you to increase your net worth and overall wealth.
Meanwhile, the cons of a no down payment mortgage are as follows:
You won’t have much home equity (to start): The first con of a zero down payment mortgage is the lack of home equity. In essence, if you don’t make a down payment, you won’t own any of your home. In contrast, even if you make a small down payment, you still get to own that portion of the property.
You will have to pay off additional interest: Since you will likely need to borrow a large sum of money to fund your zero down payment, your interest rates will likely be higher. Even if you only borrow a small amount, such as enough for a 5% down payment, the interest may still be quite high.
You go further into debt: Lastly, a no down payment mortgage translates to more debt. This can be stressful, especially if you don’t have a plan to pay your bills on time.
What Are My Options for a Mortgage With No Money Down?
Your options for obtaining a mortgage with no money down are to use a loan or line of credit to fund your down payment. Down payments are required. However, the money for your down payment does not have to come from your personal savings. Therefore, if you can’t afford a down payment on your own, you can look to another source, such as a loan.
What Credit Score Do You Need to Buy a House With No Down Payment?
You should have a credit score of no less than 650, though you should ideally aim for 680 or higher. Beyond a high credit score, you may also be required to have a good credit history and a stable job in order to buy a house with no down payment.
Is It a Good Idea to Get a Mortgage With No Down Payment?
The answer to this question varies by homebuyer. Getting a mortgage with no down payment can have serious financial consequences, including increasing your debt. Therefore, you must be prepared for the reality of a zero down payment. However, if you have a stable job and enough money to make your payments on time, it can be a wise decision.
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