Are You Being Gifted A Down Payment? Rules & Tips You Need to Know…

Being gifted a down payment can really help when you’re buying your first home or upgrading to a bigger place. Homes are so expensive these days, especially in Canada, that coming up with that big down payment can be really tough, especially for first-time buyers.

Luckily, a lot of people get help from their parents or grandparents, who give them money as a gift to use for their down payment. According to a recent study, 31% of first-time buyers got family help for their down payment, which is way up from 20% just a few years ago in 2015.

So, how do gifted down payments in Canada work? There are some rules and tips to take into consideration so getting advice from a mortgage professional is always a good idea. I’ve outlined a few pointers, below, to get you started.

What Does Being Gifted A Down Payment Mean?

A gifted down payment is simply money that has been given to you as a gift, usually by a family member or friend. Since the money is a gift and not a loan, you don’t have to pay interest on it or pay it back, just use it towards your down payment when buying a home.

Rules On Gifted Down Payments

There are a few important things to know if you’re getting a gift from family to use for your home down payment:

Who Can Give You Gift Money?

Technically, anyone can give you money as a gift, but most lenders will only let you use gift money from your immediate family (like parents or grandparents) for your down payment. The main reason is that they want to make sure the money is truly a gift, not a loan you have to pay back.

Why Does The Money Have To Be A True Gift?

Lenders don’t want you to use gifted money towards your down payment if you have to pay it? back at some point. If the money isn’t really a gift, that will actually increase your overall debt, which will increase your debt-to-income ratio which is a big factor in getting approved for a mortgage. To prove the money is a true gift, lenders will usually require you to provide a “gift letter” showing the money is not a loan.

How Much Can Be Gifted For A Down Payment in Canada?

There’s no limit on how much money can be gifted for a down payment in Canada. Your parents could even buy the whole house and give it to you as a gift, and you won’t have to pay taxes on any of the gifted funds.

What Is A Gift Letter And Why Do You Need One?

A “gift letter” is an important document you need when the money for your home down payment is coming as a gift, not your own savings. Most mortgage lenders will require the person gifting you the money to fill out and sign this letter.

The gift letter confirms that the money is truly a gift, not a loan you have to pay back. It will include the name and contact information of the person giving you the money, the amount of the gift, and where the money is coming from.

What Proof Do You Need To Show The Money Is A Gift?

Along with the gift letter, your lender may also ask for a transfer receipt. This shows that the money was directly transferred from the giver to you, which you can prove from your bank statement. The lender also wants to see proof that the donor actually sent the money. They’ll look at the transaction details to verify the money is coming from a real source and that it’s a true gift, not a loan.

If the gift money is coming from outside of Canada, you may need to provide even more detailed documentation to show where the funds are from. Make sure to keep good records of all the financial transactions.

Tips For When Being Gifted A Down Payment

Buying a home with a gifted down payment takes some planning and organization. These are some key things to consider:

1. The Gift Should Come from Immediate Family. Most lenders require the down payment gift to come from a parent, grandparent, or sibling. If the money is from someone else, like an aunt or godparent, you may need to show proof of that relationship.
2. The Gift Money Should Be in Your Account for 10 Days. Lenders prefer to see the gifted money in your account for at least 10 business days before you apply for the mortgage. This shows the money isn’t from a loan.
3. Make Sure the Recipient Can Afford the Mortgage. Even with a gifted down payment, the home buyer still needs to qualify for and afford the mortgage on their own. Have open conversations about budgets and be sure to get a mortgage pre-approval before you start house hunting.
4. Get the Gift as One Lump Sum if Possible. It’s easier if the gift money comes in one big deposit, rather than multiple smaller ones. This creates a clear paper trail. If this isn’t a good financial plan for the person giving the gift, they can contribute to an FHSA (First Home Savings Account) or RRSP in the borrower’s name over time.
5. Seek Professional Advice. As the gifter, it’s important to talk to a financial advisor to make sure the gift fits into your bigger financial investment plan and you’ve looked at any tax implications. For recipients of the gift, it’s essential to get mortgage advice from an experienced mortgage broker who will guide you through the buying process and find you the best mortgage options.
6. Include All the Details in the Gift Letter. Your lender will want specific information in the gift letter, like the gift amount, home price, who the donor is, and a statement that it’s a true gift, not a loan.
7. Self-Employed Buyers Need to Contribute Too. If you’re self-employed, you may need to contribute at least 5% of the down payment from your own funds. The rest can come from the gift.
8. Protect Everyone’s Interests Legally. If you are gifting a large amount towards the mortgage, get a legal agreement to protect the gifter’s assets in case of a separation or divorce and be sure to provide equal gifts through your estate if there are other children involved.

The key is to plan ahead, get all the right documentation, and make sure the gifted down payment works for everyone involved.

Want To Know More About Being Gifted A Down Payment? Give Me A Call, I Can Guide You Through It.

Buying a home with a gifted down payment takes some extra planning, but it can be a huge help for first-time or young home buyers. If you’re considering gifting a down payment, I can help you review your financial investment plan and look at your options. Or if you’re the lucky gift recipient, as an accredited mortgage broker, I can find you the perfect mortgage to suit your situation with the lowest mortgage rates and best options. Get started on your home buying journey – give me a call at 705-315-0516 or book a consultation today.