First Time Homebuyers: How Much You Really Need For Downpayment

Buying a house for the first time comes with its own unique challenges. You might only be a few years into your career; still paying off student loans; and probably won’t have as much money saved as you would like. Having no experience with the process of buying a home doesn’t help either.

Depending on the year and study, estimates are that 35% to 50% of home sales in Toronto and GTA are are bought by first-time buyers. With all the options available now such as 5% down payment mortgages, borrowed and gifted down payments, there’s really never been a better time to become a first-time home owner.

One of the main factors to consider when getting a mortgage is the down payment. This is the first of 4 articles that will tell you all you need to know to get that first mortgage approved.

What A “Down Payment” really means

As with most items, you can choose whether to pay for a home with cash (physical or in your bank account), or on credit.

In most situations, you pay part of the house’s asking price and the bank pays the rest. That money that came from your own bank account is called the “down payment”. Let’s say you want to buy a house for $100,000 with a 10% down payment. You would need to pay $10,000 from your savings while the bank will lend you the remaining $90,000. If you had more savings, you can decide to put down 20% as a down payment, in which case you would pay $20,000.

Whatever choice you make will have its benefits and drawbacks. For instance, a larger down payment will mean lower monthly payments in the future since you’ll need to borrow less money from your lender. A smaller down payment on the other hand means more cash on hand in the short-run. You’ll also be able to buy your dream home sooner since you won’t have to save for such a long time.

How Big Does The Down Payment Need To Be?

There are many different mortgage loan options available to first-time home buyers. Toronto and GTA Home Buyers will fall into one of three categories for mortgage financing.

  1. High Ratio Insured
  2. Low Ratio Insured
  3. Uninsurable

Each lender will have a minimum requirement, depending on your particular situation.

We’ve provided a short description of each of them below:

High Ratio Insured Mortgages

This program targets First Time Home Buyers with a minimal down payment and average credit. The requirements are 5% Down Payment on the first $500,000 of the purchase price and 10% on any amount above $500,000 but less than $1,000,000.

This applies to owner occupied residential homes with 1 to 2 units. 3 to 4 units will require a minimum 10% down payment.

The minimum required credit score is 600 but 680 is recommended. Most mortgage lenders will require a minimum score of 620. The higher the score, the higher the mortgage amount you will be approved for.

Down payments under this program can come from your own savings or investments, gifted from family or borrowed.

Home buyers under this program will have to pay for mortgage insurance from one of the three Private Mortgage Insurers (CMHC, Genworth, Canada Guaranty). The Insurance premium can be added to the mortgage, but the HST on the insurance will be payable as part of your closing costs.

Home buyers under this program will gain access to best available mortgage interest rates.

Low Ratio Insured

Low ratio insured mortgages work as per above but apply to clients who have a down payment between 20% and 35%.

As per above, Down payments under this program can come from your own savings or investments, gifted from family or borrowed and the required minimum credit requirements are the same.

The insurance premium is paid by the mortgage lender, not the home buyer. However, the cost of the insurance is passed on to the home buyer in the form of higher rates .10% to .20% higher than available lowest rates. Some lenders will now allow you to pick up the cost of the mortgage insurance and in return, provide access to best available rates. This can be financially beneficial in some cases, but not all. Your mortgage agent can help you do the math to determine the better option.

Uninsurable Mortgage Loans

Mortgage can become uninsurable for many reasons. But for first time home buyers, the most common reasons are low credit score, no credit history and an inability to provide traditional documentation as required by the Private Mortgage Insurers.

Uninsured mortgages require a minimum of 20% down payment or more, depending on each individual circumstance. Down payments under this program will typically require 5% from your own resources and the rest can be borrowed or gifted.

Home buyers under this program would typically not qualify for the lowest available interest rates.

Find out how much down-payment you need, plus how much you qualify for by booking your Free 20 minute mortgage strategy session.

Dominion Lending Centres Edge Financial
8 Sampson Mews, Suite 201 | Toronto | ON | M3C 0H5, FSCO #10710

Please visit the Financial Services Commission of Ontario Directory for more information and to check licensing status at http://mbsweblist.fsco.gov.on.ca/agents.aspx