In this day and age, it can be more and more difficult to save for that down payment you need to purchase a home. There is a product for individuals who would otherwise qualify for a mortgage, but just don’t have that down payment saved.
Flex Down Mortgages, commonly referred to as Borrowed Down Payment Mortgages are just that – when the borrower utilizes a line of credit or loan for the down payment on a home.
A Flex Down Mortgage could allow the borrower to achieve home ownership earlier, but there are some features of the product that the potential home owner should be aware of.
Debt Service Ratios
When an individual goes to purchase a home, the mortgage broker and lender will look at two ratios to determine if your income can service your debt obligations. They look at Gross Debt Service Ratio (GDS)- which accounts for all debt that is related to the house – mortgage payments, property taxes, heating, and half of condo fees if applicable. Total Debt Service Ratio (TDS) will also be looked at. This includes all your debt related to the home as well as any regular scheduled payments including loans, lines of credit, credit cards, child support, etc. So, without getting into too much industry jargon, if you were to borrow your down payment from a loan or line of credit, you would be required to service that debt with your income, thus affecting your TDS and reducing your buying power.
Mortgage Default Insurance
Any home that is purchased with less than 20% down is required to have mortgage default insurance. Mortgage default insurance protects the lender in the instance that the borrower stops making their mortgage payments and walks away from the home. There is a premium one must pay for the mortgage default insurance that is added to the balance of your mortgage. When you borrow your down payment, your mortgage default insurance premium increases from 4% to 4.5%. For example, on a $380, 000 mortgage, you would have $15,200 added to your loan amount if you were to put the minimum 5% down. If you were to borrow the down payment, you would have $17,100 added to your total loan.
Zero Equity Cushion
It is important to be cognizant of the fact, that if you are borrowing your down payment, you are essentially putting yourself in the position of not having equity in your home when you begin to repay your mortgage. This can be a dangerous position to be in.
As you can see, utilizing a flex down mortgage could potentially get you on the road to home ownership faster than you might otherwise be, but there are some features of it that you definitely need to be informed on!