Do You Need to Put 20% Down to Buy a Home?
Posted by Garman Group on
You’ve likely heard it’s a requirement to put 20% of the purchase price down when you’re ready to buy a home. Is that really the whole truth, though?
In short – no, not entirely. There’s a lot more you need to know about down payments and getting into the housing market.
The “Stress Test”
Starting back in January 2018, the BC government introduced a new program requiring almost every buyer to go through a "stress test" when applying for a mortgage. This test examines your finances and determines what kind of borrower you'll be.
Before January 2018, this test was only given to people deemed high-risk borrowers or those with a down payment of less than 20%. And although most potential buyers have to go through the test now, if you have less than 20% of your down payment, chances are you won’t fare well.
So, what can you do to get into the housing market if you don’t have a 20% down payment? It's a common question to ask these days, so we’ve come up with some options for you.
Look at Lower Priced Properties
It's common sense, right? You may be looking at $800k homes in the MLS listings but may not have 20% of that saved. But if you drop down to homes in the $600k range, you might.
Keep your options open. Check out an alternative, less expensive neighbourhood, or consider a smaller home or condominium. By setting your sights lower, you could be well on your way to becoming a homeowner.
Get a High-Rate Mortgage
If you're really serious about getting into the housing market but don’t have all the money for a down payment, you could apply for a high-rate mortgage.
This mortgage is precisely what it says, however — high rate. So be prepared to pay more interest and have other potential restrictions and fees.
Talk to Your Financial Institution About a Second Mortgage
You may be able to apply for a second mortgage to cover the amount the first mortgage doesn’t. To do this, you’ll likely need a good relationship with your financial institution — and a good credit rating — to take advantage of this option.
This is another risky move, though, because you’ll be in a lot of debt. And if you don’t pass the stress test, you may not even be approved for a first mortgage, let alone a second.
Continue Saving for Your Down Payment
We know you’re very eager to become a homeowner, but it may be worth waiting to save more money. The more of a down payment you have, the better you’ll do during your stress test. And you’ll have a better chance of receiving a mortgage at a good rate.