It can be challenging to save up enough money for a down payment of 5 per cent or more, especially for first-timers. A flex down mortgage lets you pull from a credit source for your down payment in order to let you purchase your home quicker.
A credit source can be a:
- Credit card
- Personal line of credit
- Personal loan
Here’s what you as the prospective buyers need to know about flex down programs
- You can get the very best rates in the market: Although you could be pulling your down payment from a credit source you are still eligible for the best offered rates by the lenders that offer this program!
- You’ll need excellent credit and very little debt. Flex down is a riskier product for lenders so it is only available to income-qualified, employed people with no blemishes on their credit. The ideal client qualifying for flex down would have established credit and at least two trade lines (two sources of funds that are available to them or two sources that can provide a payment history such as a credit card, line of credit, personal loan, car payment etc).
- You’ll pay more for mortgage insurance. Because flex down is a higher risk loan than one with a traditional saved down payment, mortgage insurance premiums are higher than normal. The insurance premium difference would be 0.2% higher on flex down, so with 5% down, the insurance premium would go from 3.15% to 3.35%. With a purchase price of $350,000, for example, a 5% down payment would mean $17,500 down and a mortgage of $332,500. With the lower insurance premium of 3.1%, the insurance would be $10,473, but with the higher flex down premium the payment would be $11,138. It’s not a huge difference, so the real question is whether the purchaser qualifies for flex down based on credit and debt-to-income ratio.
Lenders will factor in the monthly payment on the down payment source. Since you are borrowing money for a down payment, lenders will calculate this into their assessment of the mortgage application. They will typically use 3% of the outstanding debt as the monthly payment for the debt on the down payment for unsecured loans or a line of credit. For example, if $10,000 of a line of credit is used, the lender will calculate $300 as the monthly repayment in addition to any other debts you might have. If lenders feel that the amount of debt is too high relative to income, they may not approve the loan application.