Buyers sometimes come across homes with a seller’s
incentive at closing, but it's sometimes confusing how those incentives factor in act closing. In this blog, I share how those incentives work when it comes to your mortgage.
Take for example a home listed for $269,900. You’ve viewed the
home, you love it and with the help of your realtor you make an offer and come to an agreement with the seller for a purchase price of $265,000 - which is how much your lender will pay to the seller.
Your Side of The Transaction
Let's breakdown what it looks like on your side. You’re
putting 5% down payment from your savings that you’ve accumulated over the past
couple of years ($13,250). Because you have a high ratio mortgage (which means less
than 20% down payment), you need mortgage default loan insurance, which we
arrange through Canadian Mortgage Housing Corporation, Genworth Canada, or
Canada Guaranty, and we add that to your mortgage $10,070). For a total loan amount of $261,820. This is what your payment would be
based on for your term (length of time for your current mortgage agreement) and
based on your amortization (or how long your mortgage payments are spread out
for).
But wait!
There’s a $2000 incentive to the buyer at closing! Perhaps
this is something special being offered by the realtor, or the seller is in
military and the government is providing them with a selling incentive, or a
combination thereof.
This incentive;
Does not come off the purchase price
Does not go towards your down payment
Is not given to you in cash
So, how does it factor in?
It’s sent in like a down payment, and taken off of the total
loan amount. However, it’s important to note, it doesn’t take the place of
your down payment. You still have to come up with your own down payment and
show that you have it available from your own resources at least 10 business days prior to closing.
There’s
two reasons why this incentive wouldn’t considered your down payment;
1) You
don’t have these funds of our own resources at least 10 business days prior to closing
2) This is not a cashback mortgage. There are some mortgages that
give cashback, at a higher interest rate, but this is an
incentive at closing.
Think of it this way – essentially, the incentive is adding
to your down payment and reducing your total loan amount.
$265,000 Purchase Price
-$13,250 Down Payment @ 5% Savings
+$10,070 Mortgage Loan Default Insurance
=$261,820 Total Loan Amount
-$2000 Buyer Incentive at Closing
=$259,820 New Total Loan Amount
I hope this sheds a little light on how incentives work,
please reach out anytime, I’m always here to help! And remember – think outside
the branch!
sarahnm@mortgagegroup.com
Toll-free Direct: 1-844-315-6609