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April 30, 2019 Kristen Godel

First-Time Home Buyer with No Down Payment

Being a first-time home buyer has many challenges in todays mortgage environment. In recent years, the Introduction of the mortgage “stress test” has but an added strain on the purchasing power of most first-time home buyers. In addition to this, most home buyers find it more and more difficult to come up with the minimum 5% down payment which is required for mortgage financing.

We often get calls from clients that say that their credit is excellent, and that they have tenured jobs accompanied by decent incomes. However, due to various reasons, they find it difficult to accumulate the necessary savings to apply the minimum down payment towards their purchase.

This is more common among first time home buyers then one may think, but there are a few ways we can look at approaching this problem.

  • Firstly, most lenders allow down payments to be gifted by a family member. This means that if you are fortunate enough to have members of your family “gift” you the necessary funds for your down payment, then this may be one way to solve your problem.
  • Although typically frowned upon, funds can be borrowed from other sources, but they are required to be included in the debt servicing ratios to ensure that you are able to support the mortgage payments as well the loan from which the down payment was borrowed. If the home buyer is a strong applicant from and income & credit standpoint, this may be an alternative way to source the down payment.
  • Lastly, and sometimes the most feasible way to source a down payment is through one’s RRSP. Since there is a home-buyers plan that allows you to take up to $25,000 from your existing RRSP to use toward your down payment without any penalties, this is an excellent way to leverage an existing source of funds. As a sole applicant, this would allow a purchase of up to $500,000 based on $25,000 down payment (5%). If there are multiple first-time home buyers then each one of these applicants can tap into their RRSP in the same way, allowing an addition $25,000 each time.

Having said that, sometimes it may be the case that you do not have enough funds in your RRSP to represent the 5% that is needed for the down payment. In cases like this, it may be worth considering applying for an RRSP loan, which is a loan designed to top-up your RRSP. Then, once the funds have been in your RRSP for at least 90 Days, they can be used under the home buyers plan. Similar to the solution of borrowing funds, the only caveat to going through this route is that the payment obligations to the RRSP loan would need to be included in your debt servicing ratios.

At CMS, we often try to figure out solutions based on the individual circumstances of our clients. Since you may not cleanly fit in one situation or the other…it’s best to discuss your situation one on one so we can determine how best to help you with your purchase. Give us a call today! 905.455.5005