For many Canadians, saving up for a down payment is one of the biggest challenges of purchasing a home. Fortunately, there’s a practical solution that can help make homeownership a reality: a gifted down payment. If you’re lucky enough to have family members who want to support your journey to buying a home, this option might be the perfect fit.
In this article, we’ll dive into how gifted down payments work, the steps to using them when applying for a mortgage, and what you need to keep in mind to ensure a smooth approval process.
What Is a Gifted Down Payment?
A gifted down payment is money provided by a family member to help you cover the required down payment for a home purchase. Unlike a loan, this money is a gift, meaning it doesn’t need to be repaid.
In Canada, lenders typically allow gifted down payments from immediate family members, such as parents, grandparents, or siblings. Some lenders may consider gifts from other relatives on a case-by-case basis, but this is less common.
Why Use a Gifted Down Payment?
1. Faster Path to Homeownership
Saving for a down payment can take years, especially with rising home prices. A gifted down payment allows you to enter the housing market sooner rather than later.
2. Less Financial Strain
With a gifted down payment, you can avoid the stress of taking on additional debt or depleting your savings.
3. Better Mortgage Options
Having the full down payment ready can make you a more attractive borrower to lenders, increasing your chances of securing a competitive mortgage rate.
How to Use a Gifted Down Payment to Get a Mortgage
Step 1: Confirm the Gift Source
Before you start, ensure the funds are coming from an eligible source. Most lenders only accept gifts from immediate family members.
Step 2: Get a Gift Letter
Lenders require a gift letter to verify the funds are a gift and not a loan. The letter must include:
- The name and relationship of the gift giver.
- The amount of the gift.
- A statement that the gift doesn’t need to be repaid.
Your lender or mortgage broker can provide a template for the gift letter to ensure it meets their specific requirements.
Step 3: Transfer the Funds
The gifted funds must be transferred to your account before closing. Some lenders may require proof of the transfer and a bank statement showing the funds are available.
Step 4: Work with a Mortgage Broker
Using a gifted down payment requires careful documentation and communication with your lender. A mortgage broker can guide you through the process, ensuring all requirements are met and helping you find the best mortgage for your situation.
Important Considerations When Using a Gifted Down Payment
1. Documentation Is Key
Lenders are meticulous about verifying the source of down payment funds to comply with anti-money laundering laws. Proper documentation, including the gift letter and proof of transfer, is essential.
2. Financial Readiness
While a gifted down payment can make homeownership more accessible, it’s crucial to ensure you’re financially prepared for the ongoing costs of owning a home, including mortgage payments, property taxes, and maintenance.
3. Relationship with the Gift Giver
Discuss expectations with the family member providing the gift. While the money doesn’t need to be repaid, it’s important to have a clear understanding of their intentions and ensure everyone is on the same page.
4. Funds Coming from Another Country
If the giftor is sending funds from another country, additional documentation will likely be required. The exact requirements depend on the country of origin.
If the funds are coming from a country listed under Canada’s sanctioned countries list, the gift may not be accepted. Even if a lender allows it, enhanced due diligence will be required to ensure compliance with Canadian regulations. This could involve verifying the source of funds, additional financial disclosures, or meeting specific timelines for transferring the money.
It’s essential to work closely with your mortgage broker to navigate these complexities and understand the lender’s specific requirements in such cases.
FAQs About Gifted Down Payments
Can a gifted down payment come from a friend or distant relative?
Most lenders require the gift to come from immediate family members. In rare cases, exceptions may be made, but this depends on the lender’s policies.
Is there a minimum amount for a gifted down payment?
The gift must cover at least part of the required 5% minimum down payment for homes priced under $500,000. For homes priced higher, the down payment requirement increases incrementally.
Will the Gift Impact My Mortgage Approval?
If you have good credit, the gift itself typically won’t negatively impact your mortgage approval. However, lenders will still evaluate your overall financial health, including your credit score and debt-to-income ratio.
If your credit score is on the lower side, the lender may view this as a risk, especially if you’re relying on gifted funds for the down payment. In such cases, they may be less inclined to approve the mortgage. It’s important to work with a mortgage broker to understand your options and strengthen your application.
Let Me Help You Navigate Gifted Down Payments
A gifted down payment can be a powerful tool to help you achieve your dream of homeownership, but the process can feel overwhelming without the right guidance.
If you’re considering using a gifted down payment, I’m here to help. As an experienced mortgage broker, I’ll guide you through the process, ensure all requirements are met, and help you find the best mortgage solution for your needs.
Let’s make your homeownership goals a reality—reach out to me today to get started! Contact Alex now.