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June 2012 - When you buy a house with 5% or less down payment most likely you will lose it.

When you buy a house with 5% or less down payment most likely you will lose it.

☳ by Adam Aspilla

Most people desire to own a house than rent for the rest of their lives. Some are so passionate that they could not wait to save enough money for down payment, land transfer tax, legal fees and related disbursements.

Passion in doing or acquiring something is one of the important elements of success. However, when passion alone acted upon without proper and realistic planning, the common result is failure or financial trouble.

Buying a house is one of the biggest investments in one’s life. You may be able to buy a house with five percent down payment or less. With interest rates among the lowest in decades you may qualify for a mortgage though you have a modest income.

If your income barely met bank’s requirements to get a mortgage based on the lowest interest rate available and with the maximum amortization period of 30 years, you may likely lose your house down the road. Here is why?

Assuming the term of your mortgage is two years, for it is the lowest interest rate available. At the end of the second year you have to renew your mortgage. 

Should at the time of your mortgage renewal, the lowest interest rate available goes up by one percentage point, let us say, from three percent to four percent, with that increase, your monthly mortgage payment goes up as well. And assuming further your monthly income remains the same, it is likely you couldn’t afford to pay your higher mortgage monthly payment. 

When you default on your mortgage payments your lender will issue a Power of Sale to evict you and take over the property and sell it to the highest bidder. The proceeds of sale would be used to pay off your mortgage.  Any surplus amount would be given to you.

In the event there is a shortfall (this usually happens for houses sold under power of sale are sold below market value)- meaning the proceed of sale is not enough to pay off the balance of your mortgage, the bank or lender will run after you. If you couldn’t pay, you and your joint owner(s)’ wages could be garnished and your other assets could be attached to satisfy the shortfall.

Considering the foregoing, it is wise to avoid buying a house with only five percent or less down payment if you barely met the minimum income requirements of getting a mortgage.



Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.