How much down payment do I need to buy a house? About 10 years ago you could buy a property with no down payment. With this, you could get a mortgage that was 100% of the value of property. Mortgage guidelines however have since become more rigid and most banks and lenders have reduced the loan to value that they are able to lend.
How much down payment do I need to buy a house?
How much down payment do I need to buy a house? The answer to this depends on a few things.
Will you live in all or part of the property?
When determining how much down payment do I need to buy a house, it will depending on who will leave in the house. Traditional banks and lenders are typically able to finance a home purchase of the 95% of the value of the home when you are going to live in it on closing. The 95% is also based on you having strong employment history, good savings and a strong credit history.
Non-bank or monoline lenders can also offer mortgages up to 95% of the value of a home.
For example if you’re looking at a home price of $300,000, you could borrow 95% of this. Therefore you would get a mortgage for $275,000. In this example you would need a down payment of $15,000.
Also, if you are looking to buy a house that you will be renting out and not living in, the minimum down payment is also 20%.
However, if a portion of the rental property is owner occupied, then the down payment minimum is 5%. An example property for this is a duplex or triplex.
If not lived in by you, will a relative be living in the home?
You can buy a second home with as little as 5% down. If you are buying a home for your children to live in while in school or a home for family, this is a great way to obtain a property with little saved.
What is the price of the home?
It’s important to note that the price of the house can change the minimum down payment required. For example, in Canada properties valued at $1 million and over require a minimum down payment of 20%.
Do you have strong finances?
To buy a house with a smaller down payment, lenders want to be sure that you have strong finances. Here are five important points to help you qualify for a mortgage with the minimum down payment.
1) Down payment
Your down payment must come from a gift from immediate family member or from your personal savings. If from savings, a lender will want to see a 90 day history of the savings in an account in your name. They will be looking to see that there are no large deposits that happen during this 90 day period. However, deposits from your income are acceptable.
Learn more: Down payment on a house
Typically lenders like to see guaranteed, permanent income. If the income is not guaranteed or permanent, they usually would like to see two years of tenure in that role and will use the average income from you the last two years. This can be the case for those who are self employed.
Learn more: Self-employed mortgages
3) Credit history
Typically lenders want to see a minimum of two years of strong credit history on at least two credit items. If you only have one credit, for example one credit card, it may be a good idea to apply for another credit card. From there, you can start using it as well to help build your credit. This can also help build your credit faster.
Learn more: How to build your credit score
The debt that you carry month-to-month can have an impact on your mortgage. For any revolving debt such as from a credit card or a line of credit, lenders will use 3% of the outstanding balance in your debt to income ratio. A $10,000 credit card that is outstanding, will have a payment of $300 in the application. For each $100 in debt payment, this usually takes away about $10,000 at home price potential. With that having minimal debt is a good idea.
A lender looks at both sides of the balance sheet. This being your assets and your liabilities. If you have lots of liabilities but little assets that shows the lender that you have unbalanced finances. Also that you most likely a low or negative net worth. Having money saved for the down payment, closing costs and emergency funds are a great idea.
Can you buy a house with no down payment saved?
There are current options where you can get a mortgage with no down payment saved. This is called a Flex Down mortgage. With this mortgage, you can borrow the 5% down payment from a credit card, line of credit, family, friends and so on and you can use that for the down payment. The mortgage is still with a traditional lender and at traditional lender rates.
Learn more: Flex down mortgages
Talk to the best mortgage broker in Ottawa to learn more about, ‘how much down payment do I need to buy a house?’.