Buying a house with only 5% down

You’ll need to follow these CMHC rules



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Buying a house with only 5% down (mstay/Getty Images)

(mstay/Getty Images)

Real estate is a popular investment because for a relatively small amount of money, you can own an asset worth significantly more. It’s the power of leverage and while there can be some significant drawbacks used wisely, leverage can help you build your net worth.

For first-time home buyers, this leverage opportunity translates into a chance to put only 5% down to own your home. For instance, you could purchase a condo or home for $450,000 with only $22,500 (plus transactional/closing costs).

But to use the 5% down payment option, the following rules apply:

* The home will be your principal residence—in other words, you will actually live in the home. So if you plan on buying a condo, only to rent it out, you won’t be eligible for the Canada Mortgage and Housing Corporation’s 5% down payment option.

* The actual 5% sum must be from your own funds or from a gift from a family member. You cannot use a loan or line of credit.

* You can prove to your lender that you can cover the transactional closing costs on the real estate deal. A rule of thumb is to keep 1% to 1.5% of the purchase price aside for closing costs. So, a $450,000 home will require you to put aside at least $4,500 to pay legal fees, land transfer costs, etc.

* You must have good credit and a minimum of one year with your current employer.

* The cost to pay the mortgage, your heat and hydro, the condo fees (if applicable) and property taxes cannot exceed more than 32% of your gross taxable income—this is your Gross Debt Service ratio, or the GDS. Plus, all your consumer debt, loans and housing-related payments cannot exceed 40% of your gross taxable income—this is your Total Debt Service ratio or the TDS. To learn how banks use these to qualify you for a mortgage, read my prior post.

Read more from Romana King at Home Owner on Facebook »

One comment on “Buying a house with only 5% down

  1. Hi Romana,

    The article states that if you want to buy a home with 5% down, “You cannot use a loan or line of credit”. I believe it’s true for the five Big Banks. But as an independent mortgage broker, I have access to several lenders that will allow a borrowed downpayment. My clients can borrow the 5% from a line of credit or get a separate loan. They still get the best mortgage rates on the market too. CMHC allows it under their Flex Down program. I also help my clients get the line of credit. Clients will need a decent credit score and some conditions apply.

    This definitely isn’t for everyone, but in some cases it’s a great product. I’m doing one right now for a young couple. She recently finished her MBA and he just finished CMA exams. They’ve focused on paying off student debt, so haven’t saved a downpayment. I’m getting them a $30K line of credit, which they can use to buy a $600,000 home. Their income is high enough to service the debt. So it makes sense for them to buy now, rather than wait a couple years to save up $30K.

    Lastly, the article states the maximum GDS is 32% and max TDS is 40%. I have lenders that will allow clients to go up to 39% GDS and 45% TDS.

    Let me know if you’d like more information on the 5% down program. I love your articles and will be sharing some on Facebook.

    Thanks Romana


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