ARE YOU THINKING OF GIFTING A DOWNPAYMENT TO A FAMILY MEMBER?

Due to the real estate prices being at an all time high and wages have not kept up with inflation, it has become out of reach for most young people.  It has therefore become more prevalent that the bank of mom and dad or grandma and grandpa are helping their families with the down payment which can be quite a substantial sum.  In most instances this help comes through a gift letter and I will attempt below to help you understand what is involved should you decide to help your family by way of a gift letter.

1. WHO CAN GIFT MONEY

When it comes to gifting money for a down payment, it should usually come from an immediate family member. This is most commonly a parent or grandparent, but could also be a sibling or child. Most mortgage lenders prefer that these gifts come from direct family, so gifts from friends are off the table for conventional mortgage loans. In some cases, you may be able to be gifted by a more distant relative like an aunt or a cousin, but this will depend on the lender and you may be required to prove your relation to them.

Do not try to bend the rules by having someone else give money to a close family member who gives it to you. The lender will ask for proof that the funds came from the gifter's bank account eg a bank statement.

2.  HOW MUCH CAN I GIVE

There is no rule as to how much you can gift.  However, a buyer can get a mortgage with the entire down payment gifted.  You should be aware that, if they are self-employed they will be required to put up 5% of the down payment themselves.

3.  HOW IS IT TAXED

There is no gift tax in Canada for a gifted down payment. This means that regardless of how much you give, neither the gifter nor the recipient is required to pay taxes.

4.  A GIFT IS NOT A LOAN

The gifter should know as the person providing the money that this is not a loan. Since it is a gift, the gifter should not expect repayment, in other words, any money gifted for a down payment must be provided with no expectation of repayment, and the gifter must legally certify as much. You could loan money to your family member, but this would not be considered a gift anymore. It would instead be considered an investment and would be subject to the relevant taxes as well as potentially adding to your recipients’ total debt service and affecting their mortgage applicability.

The gifter is allowed to give borrowed money if they want, for example, if they have taken money from a home equity line of credit but they will still be required to pay back the borrowed money and interest on their own with no help from the recipient.

5.  WHAT IS A MORTGAGE GIFT LETTER

If you decide to go forward with gifting money for a down payment, you will need something known as a mortgage gift letter. Generally, the mortgage lender will want to know where the gifted money came from, how much it was, and to confirm that this money is, in fact, a gift with no obligation to be repaid. This is where mortgage gift letters come in. The gifter will provide this letter to the recipient to provide to their lender. Without a mortgage gift letter, the recipient may be unable to secure a mortgage as the lender will not be able to verify their financial situation.

Here are some things you should include in your mortgage gift letter:

1.            Name of the gift recipient
2.            Name of the gifter and relationship of the recipient
3.            Amount of money gifted
4.            Date of Gift
5.            An explicit statement that the money is a gift to be used for a down
               payment and that you have no expectation of repayment

6.  CONSIDERATIONS BEFORE GIFTING

Just to reiterate this is a gift and is not expected be repaid, so be sure that you actually have the money to spare before you gift it. Although you decided to give this gift of money, it does not guarantee your family will be able to secure a home. The buyer still needs to apply and be approved for a mortgage on their own. Therefore, it means that they must have acceptable financial credentials for the lender to consider them. If the buyer does not have a good enough credit score, a steady income, or too much debt, they may still not be able to get a mortgage even with your help.

The recipient will also still need to pay monthly home loan payments. Though you can help them through the saving phase to assist  them in getting a down payment, they will need solid financial skills on their own to ensure that they can maintain their mortgage.

There are more costs involved with buying a house than just the down payment. Though you can give a full down payment in some cases, the mortgage borrower will still be required to pay their own closing costs for the sale. These closing costs are comprised of legal fees, home insurance, inspections, and more, can add up to thousands of dollars above the purchase price.

If you need any further clarification or concerns, I work with mortgage agents who will be able to help you through this process.