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September 2007 - Be cautious in buying a house without down payment

Be cautious in buying a house without down payment

☳ by Adam Aspilla

You can purchase a house for your residence or for investment. A conventional way of buying a house is with at least five percent down payment on the purchase price if you are a first time buyer and if the property is for residential purpose. Otherwise, you pay more for the down payment.


The unconventional way is without a down payment. If you have an above average income, good credit rating and do not have lump sum amount for a down payment, a bank may approve a mortgage loan for you at one hundred percent of the purchase price.


However, it is risky to purchase a house without down payment especially if it is for investment because real estate is generally a long term investment. You need to keep the property long enough to appreciate its value. While keeping it, you have to rent it out using the rent income to pay for the monthly mortgage payment and property taxes.


Investing in real estate without the know-how to overcome the risks associated with it could lead you to financial disaster.


An example was a couple who lived in an apartment, but purchased two houses - one for the wife and one for the husband for investment. One of their friends introduced to them a man who claimed to be in the business of buying and selling houses. He explained to the couple how lucrative his business was.


Then, the couple was invited to join his business without any capital involved. The man offered them to buy his inventory of two houses one for the wife and one for the husband without down payment.


For the couple to start in real estate business, the man told the them to simply sign the purchase agreements, mortgage documents, open a bank account where the mortgage payments will be taken by the lenders, and to entrust to him the operation of the said bank account as he was to deposit funds to the said account and to pay for the mortgages.


Considering the deal was too good to refuse, the couple followed what the man told them to do. Consequently, the purchases of the two properties were consummated and they executed Special Power of Attorney authorizing the man (Vendor) to sell the properties on their behalf.


Starting a real estate business without capital, the couple felt good of what they have done. They were looking toward the future to receive at least $8,000.00 profit from the Vendor as promised.


After few months, unfortunately instead of receiving a cheque of $8,000.00, they received collection letters from their respective lenders demanding mortgage payments because the Vendor reneged on his promise to pay the monthly mortgage payments.


The couple called the Vendor and he simply told them, not to worry for he would take care of it. It was the last time they heard from the Vendor. A few months thereafter, the houses were sold by the lenders through power of sale.


Subsequently, the couple was pursued by collection agents to collect the shortfall of more than $120,000.00 since the properties were sold at prices much lower than the mortgages owing on the properties.


The couple had no alternate but to consider bankruptcy or consumer proposal.


The couple’s dreams of earning at least $8,000.00 and purchase their own house to live in were shattered by their imprudent decision.


Real estate investment is great but be cautious in buying a house without a down payment for it could bring you to financial ruin.  



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.