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Creative financing works well when the market is stagnant. This hot market may
not be conducive to Vendor participation or Vendor-Take-Back financing. Let's
discuss some of the options from the perspective of both the purchaser, as well as the
Vendor. First and foremost, the purchaser......When you can now buy a $250,000 home
with 5% down (in the greater Ottawa area), high ratio mortgage insurance (also called
default insurance) will cost 3.75% of the mortgage amount. That insurance premium
can be added to the mortgage but the amount itself ($8900) is scary. How can one
avoid having to pay this mortgage insurance? Get the Vendor of the property to lend
you (by way of a second mortgage) 20% of the purchase price ($50,000) at the same rate as
the first mortgage. This 20%, coupled with your down payment of 5% ($12500), adds up
to 25% of the purchase price. The remainder is what you require from your first
mortgagee, $187,500. We all know that 75% financing avoids the need for a high ratio
insurance company, therefore you no longer have to pay the premium of over $8900. As
long as the vendor is willing to take back the second mortgage at the first mortgage rate
(7.15%), you will have saved the premium and the interest on that premium, some $14240. As
long as you have some real money going into the venture (your 5% down payment), and as
long as the Vendor can afford the investment, more and more sellers will go along with
your offer to purchase their property. When I speak of the Vendor being able to
afford the venture, he/she cannot offer you 20% financing unless he/she has 20% equity in
the property. In other words, suppose I am selling my house for $250,000 but I still
owe to my mortgage company $210,000, I cannot afford to lend you, the purchaser,
$50,000 because I only have $40,000 equity (purchase price less outstanding mortgage). From the Vendor's perspective, taking back a second mortgage is only advisable if there is real money going into the venture, and only if you must, to accelerate the sale of your house. Too many things could go wrong loaning the purchaser money. It seems most Vendors won't have much need to accelerate their present home sale, seeing that there is very little inventory for used houses, and all kinds of demand. If you feel the need to discuss ideas relating to strategies for buying or selling, call me. |