*This post was created in collaboration with Mortgage Maestro.
The average house prices in Canada have soared exponentially in the past few years. This increase has reasonably barred many Canadians from purchasing a home. Fortunately, many parents (and grandparents) give money as a gift for down payment to children to help them buy a home. According to a report by CIBC, the amount of money gifted to first-time homebuyers has increased to a new high. Where families were gifting down payments averaging around $52,000 in 2015, now stands at $82,000.
What Is A Gift For Down Payment?
A gifted down payment is simply money that has been gifted to you, usually by a family member or friend. Since the money is a gift, it is not taxable and can be used for any purpose including putting it towards a down payment.
However, there are certain rules for using gift money as a down payment. If you’re considering gifting a child with a down payment, or if your family has given you funds to purchase a home, there are several important things to keep in mind.
Rules On Gifts For Down Payment
Mortgages have many regulations ranging from high-risk thresholds to insurance, so it makes sense that there are some rules on gifted down payments.
Who Can Offer Gift Money For A Mortgage?
Technically, anyone can send you money as a gift. However, many financial institutions demand that the funds come from the immediate family when you want to use the gift money as a down payment. There are several reasons for this, with the primary motive being that money be a true gift.
Lenders don’t want you to use gift money that requires repayment. Otherwise, it won’t be a true gift, and you would be in debt both for the mortgage and the down payment (making you a high-risk borrower). Debt-to-income ratios are a major factor when approving someone for a mortgage, so if you have to repay the gift money, that’ll increase your debt-to-income ratio.
To ensure the gifted down payment is actually a gift, most lenders will require your funds to come from an immediate family such as a parent, grandparent, or sibling. Depending on the lender, they may also require the gifter to complete a gift letter to prove these facts.
How Much Money Can Be Gifted As A Down Payment In Canada?
Canada has absolutely no tax on gifts and no cap on the amount you can receive. This means your parents could technically purchase the entire house and gift it to you. While the amount of money you can be gifted can be anything, there are rules on how much you need to put as a down payment.
Minimum Down Payment Rules
In general, you’ll need to offer 5% to 20% of your home price as a down payment. The exact amount depends on the value of your home and whether you’re employed or self-employed. If you have full-time employment the gift can cover your whole down payment. Conversely, if you are self-employed, you must pay a minimum of five percent of the total home price.
Gift For Down Payment: What Is A Gift Letter?
A gift letter (or donor letter) is an essential document when providing a gifted down payment for your mortgage. Most mortgage lenders will require your gifter to fill and sign the document. The letter will confirm that there is no obligation to repay the funds. Moreover, it will include where the money was sourced and how much it was. Essentially, the letter shows that your money is a genuine gift, issued in good faith by a donor who has no expectation of monetary gain from the transaction.
Gift For Down Payment: What Are Proof Of Funds?
The lending institution will request that you provide documentation of the transfer receipt. You can find this on your bank statement. Mortgage lenders also request proof that the donor sent the money. The bank records the transaction numbers to substantiate the source of the funds; that the money is a real gift, issued intentionally. It also shows the practical side of how much money you received.
While issues are not common, you may encounter more in-depth requirements if the money is sourced from overseas. If you are receiving a gift from overseas, plan ahead and keep all correspondence and financial records to ensure that you can substantiate the source.
5 Tips On Gift For Down Payments
Obtaining a mortgage takes organization and planning, even with a gifted down payment. To manage all the aspects of the gift, be sure that you know the five key tenets, as follows:
1. Who’s The Donor
Though the specific requirement varies based on the institution, most lenders require your gifted down payment to come from a parent, grandparent, or siblings. If the donor has a unique relationship with the home purchaser, they must substantiate that proof.
For example, if an aunt, uncle or godparent wishes to gift funds for your home purchase, you can supply an official baptismal certificate or a notarized letter to prove the relationship. However, the bank has the right to accept or reject it.
2. Self-Employed Rules
Self-employment complicates the gifted down payment process, but only if you don’t plan ahead. When you apply for the mortgage, the requirement for a down payment is a minimum of 5%, clearly sourced from your earnings. The remaining 15% of the down payment can come from a gift, subject to proof of transfer and source, and a proper gift letter.
To prove that you have the 5%, simply ensure that it’s present in your account for three months prior to the mortgage application. This shows the bank that you are a lower-risk borrower and will be able to realistically make your mortgage payments.
3. Gift Letter Period
A gift letter is a specific document that outlines essential information about the gifted funds. The gift letter has an expiration date of 90 days and it needs to be notarized. If the gift letter was issued more than 90 days before you apply for the mortgage, then the bank will need both a new letter and potentially additional information.
4. Gift Letter Contents
Each lender has a different template for the letter, ensuring that all of the details are properly represented. Essentially, it indicates that the funds are truly a gift, free of any obligation for the recipient. If a lawyer, banker, or mortgage broker learns that the money is not, in fact, a true gift, they are obligated to report it to the lender. This protects the lender by ensuring that the money is ethically represented and that they have an accurate picture of the person to whom they are lending the mortgage.
Where Can You Get A Mortgage If You Don’t Have A Gift For Down Payment?
While some Canadians are lucky enough to have parents (or another close person) in their lives to offer gift money as a down payment, not everyone does. If you haven’t received a gifted down payment, you may wonder how it’ll affect your chances of getting a mortgage.
If you’re not sure you can qualify for a mortgage without a gifted down payment, try applying with a mortgage broker such as Mortgage Maestro. They can help find you the best mortgage solution based on your finances. They work with dozens of different lenders to help borrowers find the best rates.
Other Ways Family Can Help
Gifts aren’t the only way that family members can assist in the home buying process. For starters, the money doesn’t have to be in the form of cash. Parents have other options to assist if the value of their assets isn’t liquid. These include:
Second Mortgage
If the parent or other donor has significant equity in the home, they can use it as collateral for a second mortgage. Alternatively, they can leverage it to gain a line of credit. After this, they can transfer the funds as a gift. The only caveat is that there must be a clear understanding that the parent is obliged to repay that credit line or second mortgage.
Co-Sign
Cosigning on a mortgage, in theory, comes with more risk for the parent or grandparent than a single, lump-sum gift. This assistance makes sense if the child has savings, yet doesn’t have enough credit to get the mortgage. The cosigner can assist in this regard, though it makes them equally liable for the entire mortgage.
Bottom Line On Gift For Down Payments
Gifted down payments have a few nuances, but they allow Canadians to access housing that they otherwise couldn’t afford. It can allow parents to assist children financially, set them up for the future, by putting a mortgage within reach. Moreover, a gifted down payment not only takes some pressure off of the borrower but also reduces the cumulative interest they pay on the loan and enables them to invest in housing in a realistic manner.
