what you should know about a gifted down payment
What is a gifted down payment?
A gifted down payment is exactly that: a financial gift a home buyer receives from a family member to be used for the down payment on the purchase of a home. The key element is that FUNDS MUST BE GIVEN AS A GIFT, NOT A LOAN. a gift, not a loan. The person(s) giving the gift must have no expectation that the money will be paid back. In fact, in many cases they will be required to sign something making it clear that no repayment will occur.
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Will a gifted down payment have an impact on my mortgage approval?
In a word, no. The total income of the people named on the mortgage application determines the amount they qualify for. Your down payment is separate from your mortgage amount as it must be provided to the real estate brokerage, usually once your offer has been accepted. It is true, however, that if you’re able to come up with a larger down payment, your mortgage amount will be smaller.
A gifted down payment may also mean the difference between needing mortgage insurance and being able to avoid it. If your down payment is less than 20% of the total purchase price, your mortgage will be insured. This could have impacts such as stricter qualification requirements and being capped at a 25 year amortization. If gifted funds allow you to put more than 20% down, you may qualify for a 30 year amortization, a lower interest rate or less strict borrowing ratios.
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Are there any rules around gifted down payments?
Yes there are. The person gifting the funds will be required to sign a gift letter – your lender will likely have their own form letter. The person buying the home will also have to provide proof (bank statements) that the funds in question have been deposited into the buyer(s) account, often for at least 30 days prior to closing. Longer if funds are coming from outside of Canada.
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Can I use credit to gift a down payment to my kids?
Yes, you can but it may not be a great idea. If you’re considering using your line of credit, for example, be careful about your own resulting debt load. Remember, this money is a gift that will not need to be repaid. Can you afford the payments? This is especially important if you’re on a fixed income or are hoping to retire in the near future.
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How is a gifted down payment different from co-signing on the mortgage?
If you’ve given the down payment as a gift, you won’t have any share of ownership of the property. You also won’t assume any of the risks connected to property ownership. If you co-sign a mortgage, you are one of the owners listed on the title. That means that in a worst-case scenario, you are liable for repayment if the other homeowners default on mortgage payments. Co-signing on a mortgage can also impact your future ability to borrow for your own needs. To a lender, the mortgage amount that you co-signed for looks like money you borrowed yourself so you may not qualify for any additional funds when/if you need them.
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Are there any tax implications I should keep in mind?
In general, in Canada, family members can provide a gifted down payment without either side being taxed. To be safe, its always best to double check with a tax pro.
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