I've had some clients this year who have taken advantage of a cash back program offered by some lenders. It's none of my business how a client finances a purchase but it is my job to understand the borrowing practices of the lenders and offer my opinion if I think it's worthy.
I've been bothered by the "idea" of a cash back. In principal, the Scottish genes in me yell out, "if you don't have the money, don't buy the house". However, I needed more information before I went off on a tangent so I asked my mortgage guru, Lois Volk to provide some information. Here is what she wrote:
"There are 2 ways to purchase a home without a cash down payment, i.e. by either borrowing the down payment or arranging a ‘cash back’ mortgage.
Cash Back Mortgage
· The maximum mortgage amount is 95% with a 5% cash back
· The insurance premium is .15% higher, i.e. 2.90% instead of 2.75% for a 25 year amortization
· The minimum term is 5 years
· The mortgage rate is posted, not discounted – currently approximately 5.5% for a 5 year term vs 3.99% discounted.
· The minimum beacon score is 680
· The lender advances the 5% required for the down payment to the lawyer on the closing date in addition to the funds for the mortgage
· The cash back funds can, but do not have to be used for part or all of the down payment
· The client must have 1.5% of the purchase price for closing costs
· If the mortgage is paid off before the maturity date a pro-rated amount of the cash back has to be repaid.
· Cash back mortgages are not offered by all lenders and guideline can vary.
Borrowed Down Payment
· Part or all of the down payment can be borrowed from a line of credit, personal loan or credit card
· The mortgage rate is discounted
· The insurance premium is .15% higher than for a cash down payment
· The payments on the borrowed funds must be included in the client’s debt/income ratio (TDSR)
· The minimum beacon score is 680
· The client must have 1.5% of the purchase price in non-borrowed funds for the closing costs
