*This post was created in collaboration with Alpine Credits
Home prices have skyrocketed in Canada over recent years. That, coupled with high interest rates, has made it tough for home buyer hopefuls — especially first-timers — to come up with the money to buy a home. This has led some Canadians to look outside of their bank accounts for financial sources for a down payment, including the “Bank of Mom and Dad”.
Buyers who are fortunate enough to have family members give them a few thousand dollars to put towards a down payment are one step closer to getting a mortgage and buying a home. However, such monetary gifts must be accompanied by a “mortgage gift letter” to satisfy the lender’s requirements.
Key Points
- A mortgage gift letter states that the money you were given as a gift for your down payment is indeed a gift and not a loan.
- Your lender may require a gift letter to prove that the money you were given by a family member does not have to be repaid and therefore will not be added to your debt.
- Your gift letter should include important pieces of information, such as the gift amount, the donor and recipient names, and a statement that the money is a gift.
Can You Use Your Gift Money As A Down Payment?
Money that you receive as a gift can count as a down payment for a home you want to purchase. However, many mortgage lenders will only accept monetary gifts as a down payment if it was gifted by an immediate family member such as a parent, grandparent, or sibling.
This is because the lender wants to ensure that the gift money you receive is not a loan and that you don’t have to repay it. This distinction is important to lenders because if the gift money is a loan you must repay, it can negatively impact your debt-to-income ratio and your ability to handle the mortgage payments.
A gift letter will show the lender that the money is a free gift that you don’t have to repay.
What Is A Mortgage Gift Letter?
A mortgage gift letter is a document that verifies that the money you receive is a gift that you do not have to repay. The document itself is fairly straightforward since it simply requires the information of the sender and the recipient.
In essence, it is merely a document that assures the lender that you aren’t bound by another loan that can add to your current debt. Ultimately, the mortgage gift letter ensures that the lender can accurately calculate your risk as a borrower.
What Needs To Be Included In A Mortgage Gift Letter?
A mortgage gift letter is like a contract. It has key components that must be included for it to be valid, such as the following:
- Recipient name
- Gifter’s name and relationship to the recipient
- Physical address and phone number of the gifter
- Amount of the gift
- Method of the money transfer
- Address of the mortgaged property
- A statement that the gift is not required to be repaid
While you could create a DIY mortgage gift letter, most mortgage lenders will have a standard copy on file. You’ll simply need to fill out the document with the appropriate information (as mentioned above).
In some situations, the mortgage gift letter will be enough. However, in some other cases, you may also require proof of the money’s source.
Mortgage Gift Letter Example
If you’re receiving a monetary gift from a close family member to be used towards a down payment, consider using the following template as your gift letter to provide to your lender:
| “[Date] To whom it may concern, I, [name of gifter], certify that I will give a gift of [amount] to [name of giftee], [relationship], on [date]. The amount will be applied toward the purchase of the property at [address of property]. I write this letter to certify that this payment is a gift and that [name of gifted] is under no obligation to repay the amount. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker. I have given the gift from the account listed below, and have attached the appropriate documentation to confirm that the money was received by the applicant. The source of this gift is: [Type of account] [Name of financial institution] Sincerely, [name of gifter] [gifter signature] [address of gifter] [phone number of gifter]” |
Proof Of Gift Money
Sometimes the lender may ask for the gifter’s bank account statements to confirm that the funds you received came from the donor. However, this isn’t a mandatory requirement.
In general, the lender only needs to see that the gift money has been deposited into the giftee’s bank account. That said, it’s always a good idea to keep a paper trail of the source and destination of the funds and how the money was transferred.
How Much Is A Down Payment In Canada?
A down payment on a home in Canada ranges from 5% to 20% or more of the purchase price of a home. You can make a down payment as big as you want, as long as you meet the minimum requirements, which are as follows:
- 5% on the first $500,000 of the home price
- 10% for amounts over $500,000 to $999,999
- 20% for amounts $1 million and above
For instance, the minimum down payment required on a $500,000 home would be $25,000. That can be a tall order for many home buyers, particularly those who don’t have the proceeds from a previous home sale to help. Considering how expensive homes are in Canada, getting some financial help to cover the down payment would be welcomed.
Are You A Parent Who Wants To Gift Your Child Money?
If you’re a parent or grandparent who wants to gift your child or grandchild some money for a down payment, you can source the funds in numerous ways.
Savings
Your savings would make the most financial sense. If you have enough liquid cash sitting in your savings account, then this would be a quick and easy resource to use for a monetary gift.
Investments
If you have money invested, consider cashing out your investment as a way to gift your child or grandchild money for a down payment. Of course, this option depends on the investments, as you may subject yourself to tax implications by withdrawing early.
Home Equity
If you’re a homeowner and have a decent amount of equity built up, you may be able to tap into this equity as a source of funds for your child or grandchild. You can do this by taking out a home equity loan or a home equity line of credit (HELOC). These loans are backed by your home and typically come with lower interest rates compared to other loan types.
You can quickly and easily tap into your equity through an online lender like Alpine Credits. Simply answer 3 questions and you’ll be approved within 24 hours. Income and credit scores don’t matter so long as you have equity in your home.
The Effect Of Self-Employment On Gifted Down Payments
Once the lender approves the gifted funds, there are still rules about where the mortgage down payment comes from. This is especially true if you’re looking to apply for a self-employed mortgage.
Self-employed individuals are required to come up with at least 5% on their own. Any portion of the down payment exceeding this amount can either be borrowed or accessed through a monetary gift.
So, if you’re self-employed, you must provide at least 5% of the down payment yourself. Even if you receive a gift of a full 20%, you must pay the first 5% of the total down payment.
Why Do Self-Employed Individuals Need To Contribute A Portion Of Their Own Payment?
The need to pay 5% as a self-employed person pertains to ownership of the property and mitigates the risk of default. That’s because it ensures that you can reasonably make the payments and aren’t solely reliant on outside funding.
Accurately representing your finances to the bank allows them to conduct a proper risk assessment on you as a borrower. This measure also ensures that the mortgage belongs to the person named on the loan document.
Gifted Down Payment Rules In Canada
Depending on the mortgage lender, there are certain requirements that must be met for a gifted down payment to be accepted. Here are some rules surrounding gifted down payments in Canada:
- Must Be From An Immediate Family Member. In general, the down payment gift must come from an immediate family member (grandparent, parent, sibling, or child).
- Gift Cannot Be A Loan. The gift money must be considered a present, not a loan that must be repaid with interest.
- Mortgage Gift Letter Has An Expiry. Gift letters come with an expiration date. Since financial institutions typically require down payment funds to be in your account for at least 90 days, this is the standard time during which you must close on the home.
Final Thoughts
If you need help coming up with a down payment, you can use gifted funds from an immediate family member. Just be sure that these funds are accompanied by a gift letter that states that the donor does not expect the money to be repaid.
Mortgage Gift Letter FAQs
Is the mortgage gift money taxable?
How much gift money can I use for a mortgage?
Who can gift money for a down payment?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service
