Cash Back at Closing

[Account Closed]

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

[Chris Mason]

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.