Most lenders require at least a 20% down payment (or mortgage default insurance) on a purchase transaction even with the help of a broker. In addition, many lenders will not finance a loan for which the purchase price is over 80% of the value of the home (80% of the purchase price is considered “qualified appraised value” by most lenders). Most lenders will not finance a loan over 80% of the value of the home, even if it is claimed into a home loan unless the seller has existing ownership satisfactory enough to pay for the additional insurance.
So, as a rule of thumb, buyers need to have at least a 20% down payment and have a fully documented credit history in order to qualify for most home loans. (Note: buyer’s credit history is not required to get a home loan. If a buyer’s credit history is good enough, 90% of the loan amount can be purchased. But buyers must meet the credit requirements of most lenders so they can obtain a loan in most cases. The difficulty is finding a lender willing to finance a home loan for an amount in excess of 80% of the home guideline)
However, 90% is still generally considered the average loan amount, especially in Canada. For example, the home you are purchasing may be worth $100,000. If you put down 10% of the purchase price, you need to fund your $90,000 for at least 3 years (6 years if you want to make improvements to your home). In order to get a loan for more than 90% of the value of your home, you may need to obtain a second mortgage. And, the reality is that homes generally appreciate in value – this means you will need to refinance to pay for the additional cost of your loan. In fact, it may make more sense to refinance in order to get a home loan of greater value than 90% of its value.
80% Loan to Value
80% loan to value (LTV) loans are generally used when you are buying a home that you plan to live in for at least five years or more, be sure to ask your broker if this is right for you. For example, if you plan to own your home for 5 years, your home value should be at 80% or less of its value. Believe me when I say that using a mortgage broker will cost you. In fact, since you are borrowing at more than 80% LTV, you are incurring loan origination fees, points, and other costs.
The truth is that you can actually structure a loan such that 80% of your home value does stay in your own hand as a buyer. This way, you can actually structure the purchase of a home to have an overall benefit of increasing the value of your home rather than just adding more debt. The best-case scenario is when you purchase a home at 80% LTV, have a competent installer, and do not have any negative financial obligations; you can actually structure the purchase of this home to increase its value, allowing you to lose for a down payment – and have the home funded at 80% LTV.
It is important to note that you will pay a significant amount for your down payment – it may reach 5% of the 100,000 purchase price or more. Personally, there are cases where down payments of 10% or more are required, but that needs to be drawn out. Interestingly, the higher the number of years that you plan on staying in the home, the higher the value, fuel their build-up and along with that, this translates to higher revenue in the long run – more value for the same investment. However, moving is very costly – and you will lose value each time you move, assuming your home appreciates at the same rate as your payments.
Working With a Mortgage Broker
However, the credit challenged homeowner currently struggles with their finances – property values continue to decline and, with a foreclosure on the horizon, they are one of the 80% of homeowners on this fragile stretch of the American Dream that looks exactly the way the gurus in the mortgage industry want their clients to see. That’s where the advantages in working with a mortgage broker become apparent and that’s why I prefer to improve the page to point out the advantages of working with a mortgage broker. If you have any questions for one of our broker, you can contact us today!