Borrow The Down Payment To Purchase A Home

Today we had a couple in our Mortgage Architects Office that got themselves into a bit of a jam. On some bad advice from their realtor, they decided to borrow the down payment from a friend to purchase a home for $380K. They had saved up $36K of their own money and borrowed $40K from the friend to reach 20% down. The realtor had assured them that they would easily be able to get a second mortgage later to pay off their friend. Not so fast….and not so cheap!!!

They Should Have Gone High Ratio

What does a high ratio mortgage mean? It means that you are putting less than 20% down. The consequence of this is that the qualification criteria are more strict and it needs to be insured by the government. Guess who pays for that insurance? That’s right – the borrower! So in this case, the couple got a conventional (not high ratio) mortgage because they put 20% down. But did they really? No – because now they need to get a 2nd mortgage.

Second Mortgages Are Expensive

Now instead of putting 10% down and getting a low rate on one mortgage, this couple needs to get a second mortgage at a high rate. They will also need to pay lender fees and legal fees (again), which they just did when they purchased the home! Since they only have a 10% equity stake in the home, it will make the deal even riskier for the second mortgagee and higher risk means higher fees and rate. This is a very unfortunate situation.

You Can’t Refinance Beyond 80% LTV

What makes matters worse is that this nice couple has missed their opportunity to put 10% down on the home because no lender will refinance beyond 80% loan to value (LTV). That means that they will be stuck with this 2nd mortgage until the value of the home goes up significantly.

This realtor has really put them in a bad situation. However, we are always here to help and we will help this couple stay in their home.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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