Let’s talk about gifted down payments

The number of Canadians wanting to buy a house is on the rise. That being said, the price of buying one is too! Do you have money set aside for your down payment? Is your down payment being gifted?

Although we Canadians can have a decent lifestyle with even minimum wage, it is not an easy task to save money with expenses overflowing. Even with a balanced budget, we have to deal with recurring expenses such as student loans, car payments, rent, groceries, etc.

Young working professionals seek to build their careers and life in the bigger metropolitan cities of Canada. Toronto, Vancouver, Montreal and Atlantic Canada are endowed with work opportunities. But, saving down payment to buy a house in these cities is a challenge by itself.

Many first-time homebuyers utilize a gifted down payment to help buy their first home. A gifted down payment usually must come from an immediate family member, and is used to help pay either a portion of, or the entire down payment as a gift.

How do gifted down payments help?

As a first-time homebuyer, it would be beneficial to understand the details about down payments and mortgages before you actually apply for one. Gifted down payments can be a major relief to you if you don’t have the necessary money to settle the entire down payment. 

In Canada, you can typically buy your first home by paying 5% down. However, it is advisable to put in 20% down. Because, when you pay less than 20%, you are obliged to purchase mortgage insurance. Let’s say if you can pay 5% of the down payment, and your parents gift you the remaining 15% – your total is 20%, and now your monthly mortgage is lower and you save on mortgage insurance.

Remember, it’s a gift, not a loan

Gifted funds mean that you are not obligated to repay the person gifting you the money. Your lender doesn’t want to lend money to someone who not only has to pay a mortgage but owes a separate debt to a family member. It’s an important distinction that proves that you do not have any other debt obligations when applying for a mortgage. The process for using a gifted down payment varies from lender to lender, so you will want to talk to a mortgage professional about your options.

Donor letter outlining the gifted down payment

Your donor will need to sign a letter stating that the down payment is a gift – meaning they don’t intend to receive it back. The letter would state their relationship to you, the amount gifted, the donor’s contact details and the property being purchased.

Proof of funds transferred

Your lender is going to ask both you and your donor to show that your gifted down payment has been sent and received to your bank account. Generally this means they want to see the senders receipt from the transfer on their end, as well as your receipt/statement from receiving it on your end.

Proof of source of funds

Sometimes, lenders may require proof of the source of funds from the person gifting you funds. This is not applicable in all cases, but it provides the lender with another form of verification. This proves that the money did come from the person you said it did. Due to financial regulations around Anti-Money Laundering (AML), your lender may ask questions about the funds if the source is questionable. You may face issues when accepting international funds to use as your gifted down payment depending on the country of origin. Therefore, It’s important to have your documents in order and speak with a professional ahead of time. Your mortgage broker will let you know exactly what you need.

Factors that can impact your approval

As helpful as gifted down payments can be, there are many rules and criteria each lender will review to be sure the downpayment is eligible. We’ve said it before, but you should always speak to an unbiased mortgage professional before you start your search for your first home.

Your credit score

Your credit score is the biggest factor that might influence the decision of the lender, regardless of the source of your down payment. Even if you are lucky enough to receive a gifted down payment, your credit score will impact the terms of your loan. You need to make sure that the rest of your application is strong, otherwise you may need a larger down payment outside of your gifted funds.

You don’t have money for closing costs

Even if your relatives can cover the entire down payment, you need to prove that you at least have funds to pay for the closing costs. Your closing costs cannot be gifted. It’s a reassuring factor for your lender that you aren’t completely dependent on your parents or siblings to pay for the house.

You have previously faced bankruptcy

Unfortunately, some lenders get spooked when you have faced bankruptcy in the past. Lenders won’t trust your application to be credible enough if you were charged with bankruptcy. Generally speaking, you still have options. However, you should speak to an unbiased mortgage professional before starting your search for a home. You will most likely need to be 2-3 years clear of your bankruptcy for lenders to consider your application. Your mortgage broker will help you plan how to get back on track and prepare for buying your first home.

In some cases the gift will help you put down 20% – enabling you to skip the mortgage insurance, and have lower payments, and in others, even if it’s only 5% it will still help you buy your first home sooner! When planning on buying your first home, get in touch with me. You can give me a call at 778-242-6183 or get in touch with me here!

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