Cash Back at Closing

9 Replies

I have heard that in Canada, banks are not usually comfortable with deals that include cash back at closing.

I can not figure out why. In my opinion, the banks should really only care if they are financing more than 80% of the property value and not where the 20% down payment actually came from. I have not approached any lenders yet regarding this issue, just looking to expand my knowledge on the topic if it does come up.

I would expect that there would be little difference to a seller between taking a certain amount off the asking price and giving that same amount in cash at closing as an adjustment. It would however make a big difference to the buyer.

I understand that this may affect capital gains taxes the seller could be on the hook for but this would just be part of the deal they would have to consider.

Thanks in advance to anyone that has any input.

Cheers

Originally posted by @Account Closed :

I can not figure out why. In my opinion, the banks should really only care if they are financing more than 80% of the property value and not where the 20% down payment actually came from.

 I don't know squat about Canadian mortgages, so take this with a grain of salt.

If you write a contract stating that it's a $100k property and the seller is kicking back $20k towards you (as a credit, as a loan, or in some other fashion), that means the real sales price of the home is $80k and you're asking to be 100% financed with 0% down. This is fairly transparent and obvious, even to investors like yourself, which is why you find the idea appealing. It also means you have zero skin in the game, zero investment in the property, and not a single thing stopping you from simply walking away from it if you get so much as a bad tenant. In short, this means you aren't buying a home, the lender is, but you're the one who collects all the rent. It's a sweet position for you to be in, naturally, but for the lender... not so much.

That's the logic behind why lenders are hesitant to sign on for this. There are clever ways around it frequently discussed on these forums. Recent example here in the Bay Area that I was quite happy to be a part of structuring - the relevant legal/guideline loophole(s) in Canada will of course differ. 

@Account Closed

Chris pretty much hit it on the head.  

There are two things running against the scenario you depicted:

  1. your down payment cannot be borrowed;
  2. if you have vendor concession in excess of 2-4%,  the lender's perspective is generally the property was incorrectly priced and they will reduce the amount they are willing to lend accordingly.  

It is one thing to have the Vendor kick-back $4K to replace a fence or re-shingle a roof, and quite another for them to extend a significant portion of the downpayment to you.

In some instances where there may be a legitimate concession by the vendor - say an abandoned UST was discovered during the inspection and the vendor is crediting back $7K to cover the remediation costs - the lender may insist these funds be held in escrow and released only when the prescribed work has been completed.

Thank you for the insight @Chris Mason and @Roy N. , I figured that the bank would be happy with an appraisal to verify that the "before cash back" amount was a legitimate valuation of the property. The skin in the game argument makes a lot of sense.

Thanks for the suggestion @Scott Weaner , I was already considering this as a source of cash for the down payment.

Originally posted by @Scott Weaner :

I have been able to buy properties using a HELOC for the down payment. The lender knew this and did not object.

That's because using a secured line of credit against an asset you already own is not considered borrowing - the equity you are withdrawing is your own.

Originally posted by @Roy N. :
Originally posted by @Scott Weaner:

I have been able to buy properties using a HELOC for the down payment. The lender knew this and did not object.

That's because using a secured line of credit against an asset you already own is not considered borrowing - the equity you are withdrawing is your own.

True, but still no "skin in the game" as far as actual cash is concerned.

Originally posted by @Scott Weaner :
Originally posted by @Roy N.:
Originally posted by @Scott Weaner:

I have been able to buy properties using a HELOC for the down payment. The lender knew this and did not object.

That's because using a secured line of credit against an asset you already own is not considered borrowing - the equity you are withdrawing is your own.

True, but still no "skin in the game" as far as actual cash is concerned.

 The mortgage industry in the US, which has a perverse incentive to encourage cash out refinances, actually views tapping your equity for down payment no differently than tapping a savings account from a "does this count as skin in the game?" perspective. You can even close a cash out refinance at the same time as a purchase mortgage, with the underwriter knowing everything you are doing and why.

@Scott Weaner wrote:

"True, but still no "skin in the game" as far as actual cash is concerned."

That would be false.  If you have withdrawn equity using a secured a line of credit on a property you own, it is "skin in the game".