These days it feels like the only way to buy a home is to have someone give you some or all of the down payment.
And the rules around down payments in Canada are strict:
- They must be at least 5% of the home purchase price (or higher if you’re self-employed and/or have a poor credit history).
- Any down payment lower than 20% requires you to pay for mortgage default insurance.
- They can’t be borrowed from an institution or person.
If you’ve been fortunate enough to be gifted with a down payment, your lender may have asked you to provide a mortgage gift letter.
What is a mortgage gift letter?
It’s a document signed by the person gifting you the money that indicates they’re gifting you some or all of the down payment and you don’t have to pay it back, ever. That means parents can’t tap the equity in their home, give you the money as a loan, and expect you to pay them back in the future.
The letter goes to your mortgage lender — ideally as part of your mortgage pre-approval — and they may need to verify that the money has indeed been deposited in your bank account. They don’t need to see or access the bank accounts of the gifter, however.
Who can gift you money for a down payment?
The money and resulting gift letter must be from an immediate family member. So, think parents, siblings, or grandparents. Mortgage gift letters from a friend aren’t accepted in Canada.
The money must also come from the gifter’s personal finances, so a friend can’t give the money to your parents, who then give it to you. Lenders can check the gifting trail by asking to see a recent history of the gifter’s financial statements.
Is gifted money taxed?
Nope! There is no gift tax in Canada so the money is free and clear and ready to be used for your down payment. If you later decide to use the gift for something else, that would be a conversation between you and the gifter.
Is there a limit to a down payment gift amount?
There is no minimum or maximum amount that can be gifted but there are a couple of things to keep in mind.
Let’s say you’ve got the full 20% down payment. If you’re self-employed, you have to come up with 5% of the down payment on your own — it can’t be gifted. This shows you can handle the mortgage payments. The other 15% can be gifted, however. If you’re employed full-time, you can use the gift for the entire 20% down payment amount.
Who is responsible for writing a mortgage gift letter?
The gifter is responsible for writing the letter. Most lenders have a template for mortgage gift letters that you can download, fill out, sign and submit back to the lender. The letter should include:
- The gifter’s name, address and contact info (phone number, etc.)
- The name of the giftee/borrower
- The gifter’s relationship to the borrower
- The amount being gifted
- A clear statement that the gift (money) is not to be paid back
- The address of the giftee’s new property
- Confirmation that the money has been deposited in the giftee’s account (e.g., bank statements), including the date
- The gifter’s signature
How long is a mortgage gift letter valid for?
Lenders consider a mortgage gift letter valid for 90 days. If the money was gifted more than 90 days ago, the lender may need another letter. That’s uncommon, though, because most down payments tend to happen during a short period of time, within 90 days.
The borrower’s responsibility when it comes to down payment gifts
While it’s nice to be gifted some or all of your down payment, the borrower still needs to be in good financial standing to receive a conventional mortgage (one that doesn’t require default insurance). That means having a good credit score and the ability to make mortgage payments.
Getting help with a down payment is a great thing but lenders want to make sure that the money is a gift and you can pay your mortgage. That does come with a little bit of paperwork, but it will make the process of securing a mortgage that much easier.
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