Source of the money used as a down payment?

8240 Views 20 Replies 9 Participants Last post by Shayne, Nov 6, 2009

Taxsaver

Discussion Starter · Oct 30, 2009

My broker just informed me that I could be approved for a $200,000 mortgage. I don't have any cash at this time. I am still $7000 in debt.

Let's say I buy a condo for $150,000, that would be a down payment of $7,500. May I used my line of credit availability of $8000 and use it as a down payment? Will the lender know that I used my line of credit, or he does not care? In the enventuality that he accepts, may I pay off my line of credit by increasing my mortgage? Thanks in advance for your help.

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Shayne

· #2 · Oct 31, 2009

You can use your line of credit as a down payment and it will need to be disclosed to the lender. They will not have a problem with this. You will need to be able to debt service the additional money on your line of credit.

The only issue you may run into is that you will have to show that you have 1.5% of the purchase price for closing costs. Based on the info you provided that may be tight.

The lender will not let you roll the balance of your line of credit or other debts into the mortgage. The simple reason is the property is securing the loan. With the CHMC fee your total mortgage will be $147202, basically 98% of the value of the property. If they gave you more money for the mortgage it would not be secured by the property value.

Take a very good look at your finances and decide if this is the best course of action for you. If you decide that you want to proceed take a very close look at the outcome after five years of all of your payments and debts. Depending on the interest rates of your other debts and on your line of credit you may be in a better position to take a cash back mortgage and use that money for the down payment.

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OhGreatGuru

· #3 · Oct 31, 2009

Shayne said:
You can use your line of credit as a down payment and it will need to be disclosed to the lender. They will not have a problem with this.
.

I'm not sure about that. If buyer effectively has 0 equity in the condo the lender may be unwilling to give him a $150,000 mortgage, even if it is below his "pre-approval" limit. Because the mortgage is not very well secured related to market value.

I also agree that even trying to buy what is effectively "no-money down" is an unwise practice.

brad

· #4 · Nov 1, 2009 (Edited)

I also agree that buying with no money down is usually a bad idea unless you're buying a home in a boom market and will be able to sell it in 5 years or more at a big profit.

If you're buying because you want to stop "throwing money away" in rent to a landlord, keep in mind that for the first 4-5 years of your mortgage you'll also be "throwing away" most of your money in interest. Most of the payments at the begining of a mortgage go to pay interest, with comparatively little going toward the principal. So you'll build up equity very slowly, especially since you are starting out with worse than no equity.

Furthermore, let's say at the end of three or four years you decide you don't want to live in that condo anymore. And let's say that the value of your condo has not appreciated when you sell it. You'll still have virtually no equity and you'll have shelled out thousands of dollars in condo fees, taxes, maintenance and repairs, etc., putting you further behind.

There are many scenarios in which renting is a wiser choice than buying. This might be one of them.

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Taxsaver

Discussion Starter · #5 · Nov 1, 2009

Thanks for all your advice. I think I will wait until the beginning of 2011 when I have about $10,000 as real cash, i.e. not borrowed.

brad

· #6 · Nov 1, 2009

Taxsaver said:
Thanks for all your advice. I think I will wait until the beginning of 2011 when I have about $10,000 as real cash, i.e. not borrowed.

You might even consider waiting longer until you have 20% saved up and can thus avoid having to pay mortgage insurance (which is another waste of money). If there are strong signs that real estate in your area is undervalued and is likely to start appreciating rapidly, it's worth jumping into the market before it heats up. If not, waiting and continuing to rent while you save for a downpayment could put you ahead in the long run. And if possible, avoid a long-term mortage (e.g., 30 years) which will typically cost you more in interest than you paid for the house/condo.

Berubeland

· #7 · Nov 1, 2009

An average of 3 times more !!!

brad

· #8 · Nov 1, 2009

Yeah, I actually think people shouldn't pay attention to the sale price of a home but rather consider the entire amount they'll be shelling out including interest over the life of a mortgage. It's one thing to think, "oh, that house is selling for $200,000, I can afford that, and another to realize, "that house will cost me $600,000." Your house will have to appreciate an awful lot in value in order to recoup the money you lost in interest.

Shayne

· #9 · Nov 1, 2009

OhGreatGuru said:
I'm not sure about that. If buyer effectively has 0 equity in the condo the lender may be unwilling to give him a $150,000 mortgage, even if it is below his "pre-approval" limit. Because the mortgage is not very well secured related to market value.

I also agree that even trying to buy what is effectively "no-money down" is an unwise practice.

I am sure about it. CMHC has a program specifically designed for it.

Whether it is wise or not is another matter.

OhGreatGuru

· #10 · Nov 1, 2009

Shayne said:
I am sure about it. CMHC has a program specifically designed for it.

Whether it is wise or not is another matter.

At first I was in disbelief, now I am appalled to find it is true that CMHC has "flexible" plans that undermine sound financial planning advice. But there is a cost attached. See http://www.cmhc.ca/en/co/buho/hostst/hostst_002.cfm and the table for how insurance costs go up for low down payment mortgages.

Taxsaver

Discussion Starter · #11 · Nov 1, 2009

I am almost discouraged now. lol.

I still have a line of credit balance of $7000. At this time, I have an average monthly surplus of $1000. Would you suggest I pay off the LOC as fast possible, or should I pay the minimum payment ($300 at this time) and put the remaining ($700) in a bank account to be used as down payment?

OhGreatGuru

· #12 · Nov 2, 2009 (Edited)

This is a no-brainer. Pay down debt first and postpone your home ownership dreams. There are numerous threads on this subject. You aren't "saving" if you are still in debt. The interest charges on your LOC will be higher than anything you can earn on your savings account. In 8 mos. you will have your LOC paid off and you can start putting the whole $1000/mo. into savings. 8 mos. after that you will have saved more than the $7500 downpayment you were aiming for.

Taxsaver

Discussion Starter · #13 · Nov 2, 2009

OhGreatGuru said:
This is a no-brainer. Pay down debt first and postpone your home ownership dreams. There are numerous threads on this subject. You aren't "saving" if you are still in debt. The interest charges on your LOC will be higher than anything you can earn on your savings account. In 8 mos. you will have your LOC paid off and you can start putting the whole $1000/mo. into savings. 8 mos. after that you will have saved more than the $7500 downpayment you were aiming for.

I will follow that plan. I need to calm down a bit.

Shayne

· #14 · Nov 2, 2009 (Edited)

OhGreatGuru said:
At first I was in disbelief, now I am appalled to find it is true that CMHC has "flexible" plans that undermine sound financial planning advice. But there is a cost attached. See http://www.cmhc.ca/en/co/buho/hostst/hostst_002.cfm and the table for how insurance costs go up for low down payment mortgages.

Cost goes up very little. 0.15% of the total morgage.

Want some more disbelief? It is possible for a person making $70K to finance a $500K home if they have 5% down.

Recipe for disaster for most people.

Rickson9

· #15 · Nov 2, 2009

OhGreatGuru said:
This is a no-brainer. Pay down debt first and postpone your home ownership dreams. There are numerous threads on this subject. You aren't "saving" if you are still in debt. The interest charges on your LOC will be higher than anything you can earn on your savings account. In 8 mos. you will have your LOC paid off and you can start putting the whole $1000/mo. into savings. 8 mos. after that you will have saved more than the $7500 downpayment you were aiming for.

Solid advice!

leslie

· #16 · Nov 5, 2009

"Should I pay off the LOC as fast possible, or ....." You keep going back to the attitude of "I want this thing now, so if someone will lend me the money I will buy it."

Read this page on saving. You need to change 'how you think about' waiting for gratification, and what the costs of not waiting are. Buying real estate is not the same as buying a yaught in the example, because it will increase in value, hopefully. But the concepts still hold because most people's mortgage interest rate is higher than the ppty's operating returns percent.

Cal

· #17 · Nov 5, 2009

Dude - pay off your debt....then save for a down payment.

Why would you want to not pay off your LOC and add another $150,000 of debt?

Save first...then buy condo.

Taxsaver

Discussion Starter · #18 · Nov 5, 2009 (Edited)

No problem. I will have got rid of this LOC on April 3, 2010!

I've decided last night to move out of my apartment next February 1 and rent a room at someone else's apartment. I will save $500 a month, which will give me $12,000 extra at the end of 2011 when I think I should be ready to buy my condo. So, two more years before the condo purchase.

firsttimehomebuyertips

· #19 · Nov 5, 2009

That is a great plan Taxsaver! Short term pain for long term gain

Taxsaver

Discussion Starter · #20 · Nov 6, 2009

To live at somebody's else for less than two years is not the end of the world. Like one of the songs I hate most says, "I will survive".

After the LOC is paid off, I'm considering putting all my savings in my RRSP and will use the maximum (I think it's now $25,000) toward the payment of the house.

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