Thinking About Gifting a Down Payment on a Waterloo Region Home? What You Need to Know
As real estate markets - including the Waterloo Region - have continued to heat up, it has become more and more common these days for parents or families to gift their family members money in order to help them buy a home, usually in the form of down payment funds. For many young people, due to rising market prices, homeownership is often essentially out of reach without some form of help,
It's not as simple as handing your child a wad of cash and telling them to go get a mortgage. Before any gift is given, critical considerations must be taken into account on both the giving and receiving sides.
Here we will cover some house purchase monetary gift rules such as who can give and receive down payment help, how much can be gifted for a down payment, how the funds are taxed, what is a mortgage gift letter, and more.
Who Can Gift Home Buying Money?
Anyone can normally give money to anyone they want, but when it comes to gifting money for a down payment on a Waterloo Region home, it should usually come from a close relative. This is typically a parent or grandparent, although it might also be a child or sibling.
Gifts from friends are not permitted for conventional home loans because most lenders prefer that these gifts originate from immediate family. In some situations, a more distant relative, such as an aunt or cousin, may be able to help you out, but this will depend on the lender, and you may need to establish your relationship to them.
You can't get around the close family rule by having someone else give money to someone who then gives it to you. Checking bank statements may be required by your lender to prove that the money came from the gifter's account.
How Much Money Can Be Gifted Towards a Waterloo Region Home?
If you're giving a down payment as a gift, you can basically donate as much as you like, though most people prefer to put down 20%. In most situations, a buyer can obtain a mortgage with entirely gifted funds; but, if the buyer is self-employed, they will be asked to provide 5% of the down payment from a bank account they can prove they own with funds they can prove are theirs.
How are Down Payment Gifts Taxed?
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.
A Down Payment Gift Cannot Be a Loan
As the person supplying the funds, you should be aware that this is not a loan. Any money given as a down payment must be given with the understanding that it will not be repaid, and the gifter must legally certify this. You could give your family member money as a loan, but this would no longer be considered a gift. Instead, it would be treated as an investment, subject to the appropriate taxes, as well as potentially increasing your receivers' total debt payment and impacting their mortgage eligibility.
The gifter may give borrowed money if they like, such as if they have taken money from a home equity line of credit, but they must repay the borrowed money and interest on their own, with no assistance from the recipient.
What is a Gift Letter?
If you intend to gift money for a down payment, you will require a mortgage gift letter. In most cases, the mortgage lender will want to know where the gift money came from, how much it was, and whether or not it was a gift with no need to repay. Mortgage gift letters can be helpful in this situation. The gifter will provide the recipient this letter to give to their lender. Your recipient may be unable to obtain a mortgage without a mortgage gift letter since the lender will not be able to verify their financial status.
Here are some things you should include in your mortgage gift letter:
Name of the gift recipient
Name of the gifter and relationship to the recipient
Amount of money gifted
Date of gift
An explicit statement that the money is a gift to be used for a down payment and that you have no expectation of repayment.
What To Consider Before Making a Down Payment Gift
While it's wonderful to be able to give your family member money to help with a down payment, you should think about a few things before making this decision.
As previously stated, this gift is non-refundable, so be sure you have the funds available before giving it. Also, keep in mind that this is merely a monetary gift and does not guarantee a property. In other words, you will have no stake in the purchase.
Your down payment gift beneficiary will still need to apply for a mortgage and get approved on their own. This means that in order for the lender to consider them, they must have acceptable financial credentials. Even with your assistance, if the receiver does not have a good enough credit score, a consistent income, or too much debt, they may still be unable to obtain a mortgage.
The recipient will still be responsible for making monthly mortgage payments. Though you can assist them with saving and obtaining a down payment, they will require solid financial abilities on their own to ensure that they can afford their mortgage.
Buying a house entails more expenses than just the down payment. Even if you make a full down payment for them, the mortgage borrower will still be responsible for the sale's closing fees. Legal fees, home insurance, inspections, and other closing costs can add up to thousands of dollars over the purchase price.
Overall, make sure both you and your recipient are clear on what it means to donate money as a down payment and what is still required on both sides. You need to be OK with the fact that you will provide the gift with the intention that the recipient will be pleased in their new home, with no other expectations beyond that. Except maybe first dibs on a weekend in their spare room once they move in!
If you’re still in search of that dream Waterloo Region home, contact Team Pinto. Let us use our huge local real estate experience and expertise to help you. Contact us directly here, or book a free Zoom consultation to discuss your unique Waterloo Region real estate needs at a time that's most convenient for you.