How to Buy a House with Zero Down Payment

Posted On May 17, 2024

A home of their own is a dream that most people have. Like Maya Angelou, the celebrated American memoirist, poet and civil rights activist famously said – “The ache for home lives in all of us.”

Recent reports state that in spite of the average home selling for about $700,000 in Canada, this is a dream that many Canadians are loath to give up on. They have just postponed it a while longer while they get on with the business of making a living.

But yes, it is an uphill struggle, and it is no wonder that even the minimum down payment seems out of reach for many potential investors, especially first-time homebuyers. In such a scenario, the idea of buying a house with zero down payment might sound like a pipe dream.

However, though slightly more difficult, it is possible to make homeownership a reality without making an upfront cash payment. You just need to take a slightly less-travelled path.

Decoding Down Payment

While you may already know this, it is worth repeating. A down payment is the lump sum you pay when you buy a home, and it plays a very important role in determining your mortgage terms and amount.

In Canada, the minimum down payment ranges from 5% for a home costing under $500,000 to 20% for a house with a price tag of $1,000,000 or more.

This means that you are looking at a minimum down payment of $35,000 for the average Canadian home, not taking other add-ons such as mortgage insurance and so on.

Introducing – Zero Down Payment Mortgage

Saving for a down payment is easier said than done, given the rising prices of real estate in many Canadian cities. And even the minimum down payment requirement can be an amount that many potential homeowners find challenging to afford.

This is where a no-down payment mortgage comes into play.

A zero down payment mortgage means that no money has to be paid upfront at the time of closing. Instead of using your own savings for the down payment, both the mortgage and the down payment are funded by a lender.

If this sounds too good to be true, well, it is. You must know that you’re essentially borrowing money for your down payment, which means taking on additional debt. Therefore, before considering this option, it’s paramount to ensure that you’re in a position to take on this added fiscal responsibility.

More About a Mortgage Without Down Payment

There are a few misconceptions about a mortgage without down payment. Let’s look at them.

The most common misconception about no down payment mortgages is that they don’t require any money upfront. While it’s true that no money is needed at closing, you’ll still need cash to cover standard closing costs.

Additionally, if your mortgage is from a federally regulated lender, you’ll need to borrow your down payment funds from some other financial institution. Since July 1, 2020, the Canada Mortgage and Housing Corporation has not allowed “non-traditional sources of down payment that increase indebtedness.”

Simply put, CMHC-insured mortgages cannot use borrowed funds for the down payment. However, other Canadian insurers like Sagen and Canada Guaranty still allow qualified buyers to borrow their down payment from various sources.

Sagen, for instance, allows borrowers to use personal loans, lines of credit, or even monetary gifts from non-related individuals towards their down payment. Similarly, Canada Guaranty offers flexible options for borrowers with solid credit through its Flex 95 Advantage program.

Alternatives for Down Payment

If you cannot secure a down payment through the traditional methods, there are alternative lenders or private mortgages that offer more flexibility.

Private Mortgages

Private mortgages are not federally insured like traditional mortgages; they allow for more leniency in using borrowed funds for down payments. However, dealing with alternative lenders typically comes with higher interest rates that offset the lender’s increased risk.

Flex Down Mortgages

But what if you don’t want to take on the additional charges?

Fortunately, there are other ways to secure a down payment without saving for it. A Flex Down mortgage allows you to borrow the down payment from one lender to secure your mortgage. Accepted sources for this borrowed money include a personal line of credit or a home equity line of credit (HELOC), or even a personal loan from a family member or someone close to you.

You may be tempted to use a credit card, but it is risky because of the high interest rates.

Government Assistance

Canada has various government programs at both the federal and provincial levels that offer down payment assistance to eligible buyers, providing loans or grants to help cover the upfront costs of homeownership.

Depending on where you live, you can explore government assistance programs to help with your down payment. Some of these programs are:

• Nova Scotia Down Payment Assistance Program (DPAP): First-time homebuyers can apply for a loan of up to 5% of the home’s purchase price. These loans are interest-free and must be repaid over 10 years, with a maximum loan amount of $25,000.

• Manitoba Housing Down Payment Assistance: This program provides down payment assistance to eligible applicants looking to purchase a vacant home owned by Manitoba Housing in specific rural areas or to current tenants wishing to buy the house they are renting from Manitoba Housing.

• PEI Down Payment Assistance Program: Eligible individuals can apply for an interest-free loan of up to 5% of the home’s purchase price, with a maximum loan amount of $17,500. This loan is intended to be used as a down payment.
  
  You can also check if your municipality offers financial assistance for down payments. For example:

• Region of Waterloo Affordable Home Ownership Program: This program offers down payment assistance loans of 5% of the home’s purchase price (up to a maximum of $480,000) to low- to moderate-income households.

• County of Simcoe Homeownership Program: This program provides up to 10% down payment assistance, paid directly to your lawyer in trust at closing.

Buy A Home with Zero Down Payment

Summing up, while the idea of purchasing a home with zero down payment may seem like a dream, you can do it with the right knowledge and resources. There are several options, such as alternative lenders, government assistance programs, and creative financing solutions.

There are several advantages to zero-down payment loans. You won’t have to clean out your cash reserves or wait until you’ve saved enough for a down payment. This means you can start building home equity sooner rather than spending money on rent.

However, there are also some drawbacks, such as higher interest rates based on your creditworthiness. You will also be increasing your overall debt and debt-to-service ratio, as you’ll have both a mortgage and a mortgage down payment loan.

Taking on additional debt is risky, particularly if housing prices drop, interest rates rise, or an unexpected life event, like job loss, affects one’s ability to manage debt.

Generally speaking, the more money you can save before purchasing a home, the better. This approach will save you more in the long term, as you’ll pay less over the life of the loan. While using down payment loans can be a feasible solution, it often makes more financial sense to wait and save for a down payment.