When parents choose gift down payments it is important to keep in mind that there should never be an expectation that this money will be repaid (gift vs. loan). Additionally, anyone gifting a down payment is not entitled to ownership of the home – they won’t be registered on title or on the mortgage.
What do you need to prepare a Gifted Down Payment?
To grant a gifted down payment for a home, all parties must sign a mortgage gift letter. This letter outlines the names of those granting and receiving the gift, as well as their relationship to one another and the amount of money being gifted towards the purchase of a home. The letter will include their signatures and contact information as well.
Lenders will also require proof that the money has been deposited into the borrower’s bank account, whether through a direct transfer or bank draft. This is to ensure there is full transparency around the flow of funds and to help verify where the money came from.
When it comes to gifting down payments for a home, the money must 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. Your lender may require proof that the money actually came from the gifters bank account by checking banking statements.
Since this money is being given as a gift, it’s not considered a loan. This is partly why only immediate family members are eligible to gift down payments. If the money was coming from someone else, chances are there would be some arrangement for repayment, which would then classify the transaction as a loan. In the case of a gift, there’s no repayment involved.
There’s no limit on the amount of money that can be gifted as a down payment. If you are gifting a down payment, you can essentially give as much as you want, though most people like to put 20% down on their homes. In most cases, a buyer can get a mortgage with the entire down payment gifted.
Just because someone receives a gifted down payment, this does not mean their mortgage application will automatically be approved. Applicants are still expected to meet the requirements to qualify, similar to anyone else who is applying for a mortgage without a gifted down payment. This includes proving creditworthiness based on income and expenses. However, gifted down payments often help homebuyers qualify for higher mortgage amounts.
Luckily, there is no gift tax in Canada for gifted down payment money. This means that regardless of how much you give, neither the gifter nor the recipient is required to pay taxes.
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. The gifter will provide what is know as a Mortgage Gift letter to the recipient to provide to their lender. Without a mortgage gift letter, your recipient may be unable to secure a mortgage as the lender will not be able to verify their financial situation.
Here are some things to include in your mortgage gift letter:
The biggest consideration to keep in mind for those gifting down payments is that there should never be an expectation that this money will be repaid. Additionally, anyone gifting a down payment is not entitled to ownership of the home – they won’t be registered on title or on the mortgage.
