As you all probably know, as of October 15th 2008 lending institutions will no longer be offering zero downpayment mortgage programs. No worries, you will still have the ability to purchase a home with no downpayment. Here are two available options: 1) Borrow the 5% downpayment on your own through a bank or someone else or 2) A cash back mortgage where the lender loans you the 5% downpayment and the downpayment is included in your mortgage payment. Both of these options still allow you to get a mortgage where 100% of the purchase price is from borrowed funds. Please check our current rates for the up to date mortgage and cash back mortgage rates.
Let’s go through an example with each option assuming a purchase price of $400,000 and amortizing the mortgage over 35 years.
Option 1) Borrowing the money through your own means. In this scenario assuming you could borrow the 5% downpayment ($20,000) through a bank at Prime + 3.00% (7.75%) with minimum payments of interest only, the monthly payment would be approximately $129.17. The total mortgage portion including mortgage insurance premium would be $392,540.00 assuming a 5 year fixed interest rate of 5.45%. Monthly payments would be $2,079.57. In summary the total loans outstanding would be $412,540.00 with combined monthly payments of $2,208.74. You may find it difficult to get an unsecured loan from a bank. Or having to deal with two separate loans and payments can be very confusing so in this case option 2 is available for you.
Option 2) Cash Back Mortgage programs offered through the lenders where along with the mortgage, the downpayment is lent to you with one easy application process. The full $400,000.00 is lent to you at a slightly higher 5 year fixed rate currently at 7.20%. In this scenario total mortgage including the mortgage insurance premium is $412,540.00 and total monthly payments are $2,662.87.
As you can see in the two examples above your payments are slightly lower in option 1. This is because you are only paying interest on the downpayment loan and nothing to the principle portion where in option 2, more money will be going towards your principle. Also finding financing yourself for the downpayment can be very difficult to obtain and each situation is unique so please feel free to contact us to see which option is best for your individual situation.
For both options you must have a strong credit score (650 or above). In addition you must have 1.5% closing costs from your own resources that cannot be borrowed. Closing costs are fees associated with lawyer’s fees, moving costs, property tax adjustments, etc. In the example above using the $400,000 purchase price, the closing costs would be $6,000.
One would think that with the higher interest rate and borrowed downpayment you would qualify for much less than the old zero down mortgage program, but this is not the case. For example, if you were to qualify for a $300,000 mortgage using the zero down mortgage program, the cash back or borrowed downpayment programs would qualify you for approximately $290,000. That’s only $10,000 less. The reason for this is the lower insurance premium as well as the ability to qualify at 35% GDS and 42% TDS, which is higher than the 40% TDS required for the zero down payment program.
The cash back mortgages are also accessible to a greater number of applicants as the credit score required is lower than for the zero down program. For example, you need a 680 or greater credit score with the old zero down program. The cash back or borrowed downpayment programs allow you to purchase with a minimum credit score of 650. This means more opportunity for you to purchase your dream home faster.
So if you don’t have the downpayment saved up no problem we can help you get into that dream home faster than you think. If you have any questions or would like to apply today please contact Betty at 403-532-3927, e-mail bsaskiw_prolink@telus.net, Kevin at 403-589-3021, kevsas@telus.net or at our website: www.yourmortgagecontact.com
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