Everything You Need to Know About Gifted Down Payments
Understanding Gifted Down Payments: A Comprehensive Guide
Everything You Need to Know About Gifted Down Payments
Gifted down payments offer an avenue for individuals to receive monetary support from family members or close relatives towards purchasing a home. It’s essentially a non-repayable financial gift that aids in the home buying process, often coming from parents, grandparents, siblings, or other closely related individuals. Unlike a loan, this gift doesn’t require repayment, and the giver typically relinquishes any expectations of reimbursement, usually formalized through a signed agreement.
How do Gifted Down Payments Differ from Co-signing?
When providing a gift, the giver does not claim ownership of any portion of the property, nor do they bear any associated risks. Conversely, co-signing involves being listed on the property title and assumes 100% liability if the homeowners default on their mortgage. Co-signing also impacts an individual’s borrowing capacity, as the co-signed amount reflects as if it were borrowed personally.
Do Gifted Down Payments Affect Mortgage Approval?
Gifted funds do not influence mortgage approval based on income. The down payment supplements the maximum amount an individual qualifies for. However, a larger down payment reduces the borrowing amount. This surplus can potentially enable someone to afford a larger property than they would have otherwise.
“A gift can also elevate your purchase from an insured one (less than 20% down) to a conventional one,” states Harrison. “With a 20% or more down payment, you might qualify for a 30-year amortization with more flexible debt ratios, impacting the total mortgage you qualify for significantly.”
Understanding Rules around Gifted Down Payments
To formalize the gifted down payment, a mortgage gift letter (each lender provides its template) must be signed by all parties involved. Documentation proving the deposit of gifted funds into the recipient’s account is necessary, typically required at least 15 days before closing. For funds originating from outside Canada, showing these in a Canadian account 30 to 90 days before closing is standard practice.
Moreover, compliance with Canada’s anti-money laundering laws might apply depending on how the gifted funds are used in the transaction. For instance, if funds are directly provided to the REALTOR®, verification of the fund provider’s identity becomes mandatory.
Can Borrowed Funds Be Used for Gifting Money?
Yes, borrowed funds can be used, although it’s relatively uncommon, with only approximately 5.5% of gifting parents utilizing debt for this purpose. However, caution is advised regarding debt load, especially for those considering retirement in the near future.
Tax Implications and Protection of Gifted Down Payments
In Canada, gifted down payments aren’t subject to taxation when provided by immediate family members. Seeking advice from a tax professional for individual financial situations is recommended. To safeguard the gift in case of a recipient’s separation from their partner, Harrison advises considering protective measures to prevent half of the gifted amount from being claimed by the departing spouse/partner.
For further insights into securing a down payment, consider exploring Down payment planning: examining RRSPs, TFSAs, and FHSAs.
In conclusion, aiding immediate family members with a down payment can be a valuable step in enabling them to enter the real estate market, facilitating their homeownership journey. However, readers should understand that this information serves for informative purposes and not as financial or legal advice.
