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How to Borrow Money for a Down Payment

Written by Jessica Steer
One of the most difficult things about purchasing anything is coming up with the down payment funds. This is especially true for first time homebuyers. The good news is, there are ways around that. You can receive your down payment as a gift or even borrow the down payment. How exactly does that work? Well, the details depend on your individual situation. The process will be a little bit different for everyone. In fact, you may even have more money for a down payment than you even realize.
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    Mortgage Down Payments

    When it comes to purchasing a home, it isn’t specified anywhere that the money for the down payment has to come from your bank account. While it may come as an additional cost and can be more difficult to get approved for, you can actually borrow your down payment. That being said, whether you are purchasing the home for yourself or as an investment property can make a big difference. If you are purchasing the home as a primary residence, you have a few more options to choose from.

    Borrowing Money for an Investment Purchase

    If you borrow money for investment purposes, keep in mind that the process is going to be a little bit different. This is because, even if it is your first purchase, you are not going to live in the home. If you don’t intend to live in the home for at least a year after purchasing then there are certain things you are not eligible for such as the RRSP home buyers program, some down payment assistance programs as well as a reduced down payment.

    As we mentioned, in Canada as a first time home buyer you are allowed to reduce your down payment to as low as 5% of the purchase price. That being said, you cannot do this if you are purchasing the home as an investment property. You must live in the home for the first year after purchase to qualify for this. The minimum down payment required for an investment property is 20%.

    If you are choosing to borrow for an investment property then you would be eligible to use the following options:

    • Personal Loan
    • Line of Credit
    • Credit Card
    • Loan from Family

    If you already own a home and are looking to purchase a second property then another option available to you would be a home equity line of credit (HELOC). You could also use a home equity loan. How these work is that you are able to borrow money from the existing equity in your current home minus any amounts that you still have owing on the mortgage. This tends to have a much lower interest rate than any other loan but it is also risky. This means that the down payment is now a secured loan against another property and if you default on these payments you may lose your home.

    Is a Down Payment Required for a Vehicle Purchase?

    Whether or not a down payment is required for a vehicle purchase is ultimately up to the lender. Most lenders will require 10%-20% of the purchase price as a down payment, but depending on your credit score, they may waive the down payment all together.

    If you do put a down payment on a vehicle, it isn’t necessarily a bad idea. Not only will it reduce your monthly payments, but it will also reduce the amount of interest that you will need to pay on that purchase. Because down payments tend to be much less on a car purchase since the value is less, this can make it easier to borrow.

    If you are looking for some way to borrow a car down payment, there are plenty of options available to you. You can go for a personal loan, line of credit or even a credit card. While these options may cost more interest than what is on the car loan, they all have the option to be paid off relatively quickly.

    Ways to Borrow your Down Payment

    When it comes to borrowing money for your down payment, you actually do have a few different options. Some of these options are better than others though. It is important to keep in mind that even though you don’t have to come up with the down payment up front, you now have to pay interest on the money you are borrowing. This means that you should pay close attention to what those costs will be, it will also affect your total approval amount for your mortgage.

    Personal Loan

    The first option with the lowest interest rate is a personal loan. Personal loans are often very flexible and you can make the payments on the same schedule as your mortgage. They are more structured and usually can be paid off in 3-5 years. A lot of personal loans are also open loans, meaning that you can put extra money on them whenever you have it and can pay them off early.

    Line of Credit

    Another way you could borrow money for your down payment is with a line of credit. Line of credits work a little differently than a personal loan. They are a form of revolving credit, meaning, only the interest is required to be paid and you can pay off and use up to the credit limit as much as you please. That being said, lines of credit tend to have a slightly higher interest rate than personal loans. They also normally have variable interest rates. This means that The interest rate changes with the prime rate. Another thing to consider about line of credits is that they don’t require a principal payment so you can end up leaving them and paying more interest over time.

    Credit Card

    Using a credit card for a down payment has the highest interest rate of all of the options. Not only that, if you don’t pay back the cash advance within 30 days then you have to start paying an extremely high interest rate. Cash advance rates are usually higher than the standard 20% used for regular transactions.

    Money From Family

    A way to avoid interest when borrowing a down payment is to borrow money from family. In some cases family members will just give the money. Either way, the lender may ask for some sort of letter proving where the funds come from for the down payment so it doesn’t seem like the funds appeared out of thin air. Even when it comes to having your own down payments, lenders require proof that the money has been sitting in your account for at least 3 months. They even like to see the transactions of you putting the money into savings.

    RRSP Contributions

    While this isn’t necessarily a no down payment solution, using your RRSP contributions to purchase your first home is a great way to avoid the interest rates from borrowing a down payment. This is called the Home Buyers' Plan. This plan lets you borrow up to $35,000 from your own savings in your RRPs for your first home purchase. There is no penalty to withdraw this money and you have up to 15 years to pay back the funds. Repayment won’t start until the second year after you withdraw the funds.

    In order to qualify for the Home Buyers' Program, you must:

    • Be a first time home buyer
    • Be a Canadian Resident
    • Make the home your principal residence within a year of the purchase
    • Sign an agreement on a qualifying home purchase (your house deposit does not have to be made yet though)

    If you have met all of these requirements then you are able to take the money out of your RRSP penalty free. It is actually a relatively simple process and you are using your own money to fund the down payment. When you pay back the funds when your repayment period starts, you are given a minimum amount that is required each year and it is all done when you file your yearly tax return.

    Down Payment Assistance Programs

    Depending on where you live in Canada, there are quite a few provinces that will provide some sort of down payment assistance. There is also a federal program called The First Time Home Buyer Incentive. This program allows Canadians to purchase a home by offering certain Canadians 5-10% of the purchase price, giving the home buyer a larger down payment. This amount does have to be repaid but it is much less than interest on a loan.

    This incentive is for first time home buyers only and considered a shared equity amount. How much you give back in equity will depend on when you make the repayment. Currently, if the home appreciates then the government's portion is up to 8%per year. With depreciation, it will go down up to 8% per year.

    In order to qualify you must make less than $120,000 per year ($150,000 in more populated areas like Toronto or Vancouver). You must also qualify for mortgage default insurance from the CMHC (Canada Mortgage and Housing Corporation). The CMHC is Canada’s equivalent to the Federal Housing Administration in the US.

    Credit Score Needed to Borrow a Down Payment

    If you are considering borrowing money from a financial institution for a down payment, the higher the credit score that you can have the better. Not only do you have to be sure that you can get the down payment, but you also have to be sure that you can get approved for the mortgage as well.

    In order to get a loan most lenders like you have a credit score of at least 620. If you can get a credit score somewhere between 680 to 700, then you are likely to get a much better interest rate. If you can bring your score higher than that then you are likely to qualify for a great interest rate. That being said you still need to qualify for the mortgage.

    In order to qualify for a mortgage in Canada, if your down payment is going to be less than 20%, you need to qualify for CMHC mortgage default insurance. This protects the mortgage lender if you default on your payments. In order to qualify for this insurance, the CMHC requires that you must have a credit score no lower than 680. For this reason, in order to get a down payment loan it is recommended to have a credit score of around 700 but no lower than 680.

    CTA: Are you looking for a mortgage? Well, Spring Financial can help. Apply online, and you can work with one of our licensed agents to get access to some of the best mortgage rates. You can also chat with an agent online or give us a call at 1-877-393-1516.

    Prerequisites for Getting a Down Payment Loan

    When you are looking for a loan for your down payment, you are going to need some of the same things that you would need to get a mortgage.

    • Proof of employment: This is going to be either a letter of employment from your work or 2 of your most recent pay stubs. In some cases both may be required.
    • Credit Check: This is going to show the lender your credit score, your credit history and your debt to income ratio. Your DTI should be relatively low if you are looking for a down payment loan because your total DTI (with loan payments, mortgage payments and all other debt) should be no more than 40% of your monthly income. This gives the lenders more confidence in you making your payments on time while covering your bills and other housing costs.
    • Copy of ID: This is usually a government ID like a drivers license or passport. In most places in Canada, a personal health card isn’t accepted.
    • Bank Statements: It is required to have a bank account to get financing in Canada. Lenders usually require no less than 90 days of bank statements in order to prove you have a bank account, verify your income and show that your account is active.

    If you don’t choose to go this direction then the process is a little different. For government assistance programs you would have to apply for approval on those. Taking money from your RRSP requires a form you have to sign and bring to the bank. If you are getting a loan or being gifted money from an immediate family member, then you would have to speak to your lender about what they require as proof for the loan or gift. This is usually just a gift letter, or something that is equivalent to that.

    Should You Borrow Your Down Payment?

    In reality, whether you should borrow your down payment or not really depends on you and what you can realistically afford. If you are able to use one of the options that doesn’t require any interest payments, great. If you aren’t, then you should ask yourself some questions. Does it make sense to borrow a down payment? How long would it take you to come up with the money without borrowing it? Can you realistically afford it? You should also consider your living options. Does this give you the best place to live? How do the mortgage payments and loan payments relate to what your rent payments would be? If you have thought it over, considered your finances and it seems to be the best option for you then it can be a great way for you to stop making rent payments and start building quality.

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