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It's true that lenders typically like to see a deposit of at least 20% of your property's purchase price. However, it is sometimes possible to buy a home with much less. Some lenders offer mortgages of 90% or even 95% of the property's value, which means you could potentially get into the housing market with a deposit of just 10% or even 5%.
While this option does sound too good to be true, it is absolutely possible. To help you learn how to buy your dream home with the minimum initial payment, the experts at DOMINION LENDING CENTRES, MORTGAGE MENTORS - TEAM NEXGEN have put together a list of three facts that will reveal the Truth about 5% down payment mortgages.
The myths
Myth 1: You must put 20% down to buy a home
It is a myth that you must put 20% down on a property unless you’re a first-time homebuyer. You may put 5% down on any property that is less than $500,000. If the purchase price is from $500,000 and $999,999, you must put 5% down on the first $500,000 then 10% down on anything up to $999,999. There are a few cases where you must put 20%, for instance, if the purchase price is $1 million + or if you’re purchasing a rental.
Myth 2: You must complete the sale of your existing property to use the equity as a down payment for a new property
There exists something called bridge financing for the situation where you have your current home sold, but the transaction has not yet taken place. Certain lenders will temporarily lend you the down payment for your new property while the other transaction is being finished up.
Myth 3: The First Time Home Buyer (FTHB) status affects the % you put down on your home
In British Columbia, FTHBs receive an exemption from paying the Property Transfer Tax (PTT) for any home purchased for less than $475,000. If your home is purchased for more than $475,000, you may be entitled to partial benefits. However, FTHBs are not entitled to putting 5% down on any property of their choosing.
The facts
1. You need not be a first time home buyer to qualify for a 5% mortgage
We often meet individuals assuming that 5% downpayment mortgages are only for first-time home buyers and students. This is a misconception that limits their ability to utilize what can be a beneficial service. In reality, anyone can get a 5% down payment mortgage for property and other expenses relatively quickly, with minimum risk.
2. Low down payment, 5% mortgages make sense in certain situations
Before the housing crisis of 2008, low down payment mortgages were often offered to people who were at a high risk of default, such as those with high debt-to-income ratios. Since then, the mortgage industry has been regulated to protect people from predatory loans. Now, even for borrowers with excellent credit and a steady income, a 5% downpayment loan can be a financially sound option, allowing you to start investing and building equity sooner. Additionally, a 5% down payment will enable you to not tie all your money up in one large down payment, giving you the option to invest elsewhere or save for retirement.
3. General criteria for availing of a 5% down payment mortgage
In low down payment mortgages, lenders cover more of the purchase amount and hence take on more risk. Because of the added risk, lenders require a minimum credit score of six hundred in most cases. Similarly, in most situations, you'll need a minimum of 5% down for properties under $500,000 with added down payment requirements for properties worth more than that.