Many first-time homebuyers leverage a gifted down payment to help buy their first home. A gifted down payment usually comes from a family member by helping pay either a portion of or the entire down payment as a gift. In most cases, lenders will require that the gifted funds come from an immediate family member.
In Canada, the minimum down payment requirement for homes up to $500,000 is 5%. It is common to see first time home buyers put down 5% of their own funds and their parents gift the remaining 15% to make a 20% down payment to avoid payment extra for mortgage default insurance. Any amount of gift can help you to reduce your mortgage payment and buy your first home sooner!
Remember, it’s a gift, not a loan
Gifted funds mean that you are not obligated to repay the person gifting you the money. Your lender doesn’t want to lend money to someone who not only has to pay a mortgage but owes a separate debt to a family or friend.
Gift letter outlining the gifted down payment
Your donor will need to sign a letter stating that the down payment is a gift. Therefore, meaning they don’t intend to receive it back. The letter would state their relationship, the amount gifted, the donor’s contact details and the property being purchased.
Proof of funds deposited
Your lender is going to ask you to show that your gifted down payment has been received to your bank account. Just an added security for them to know that the money is available to pay. This also validates that the money available for your down payment was gifted, and not received from other sources.
Factors that can impact your approval
As helpful as gifted down payments can be, there are many rules and criteria each lender will review to be sure the downpayment is eligible.
Your credit score
Your credit score is the biggest factor that might influence the decision of the lender, regardless of the source of your down payment. Even if you are lucky enough to receive a gifted down payment, your credit score will impact the terms of your mortgage. You need to make sure that the rest of your application is strong, otherwise you may need a larger down payment outside of your gifted funds.
You don’t have money for closing costs
Even if your relatives can cover the entire down payment, you need to prove that you at least have funds to pay for the closing costs. Your closing costs cannot be gifted. It’s a reassuring factor for your lender that you aren’t completely dependent on your parents to pay for the house.
When planning on buying your first home and need advice on your down payment, give me a call at 780-288-0643!
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors