Yes, using gifted funds for a mortgage down payment is allowed
When the time comes to secure financing to buy a home, one of your biggest challenges could be raising a high down payment. This will help you reduce the amount you owe making it easier to pay off the loan faster. Perhaps your parent or relative may be willing to top up the down payment by handing over cash in form of a gift. Remember banks and other lending institutions always want to ensure that the money you give as down payment can be traced. They need to know the actual source of the funds. Therefore, if you’re planning to receive gifted funds for a down payment, understand the mortgage guidelines and laws that apply in this situation.
Who is allowed to gift the funds?
Lenders do understand that raising all that down payment alone, especially for first time home buyers, can be challenging. Therefore, they do allow a gifted down payment. This money can only come from a close relative, that is, a parent or sibling. The reason why the rules for gifted down payment are pretty narrow is that people took advantage of it to commit fraud. Remember that not all costs can be gifted. In fact, you cannot receive money as a gift to cater for the closing costs.
The process of receiving gifted down payment
The gifter (could be the mother, father, sister or brother) will be required to sign a letter. This letter will need to state that the funds given do not need to be paid back. The person will also have to provide details such as the amount of money given, their address and phone number. Once the letter is sent to the respective lender, they can call the gifter to verify the information.
Some lenders will perform other background checks to determine where exactly the gifted funds are coming from. They may want to know if the parent is using his/her home equity line of credit to fund your mortgage. You just need to show the lender the actual transaction of the money being transferred into your account.
How much can be gifted?
The lender can allow you to receive the entire down payment amount as a gift. However, you need to be really strong in other areas of your application to show that you can afford the mortgage payments when the loan is approved. For instance, you may need to show a really strong source of income in form of an employment contract. You may also be required to have a really good credit score and at least cater for other expenses such as the mortgage closing costs on your own.
If you are not able to receive the cash from a family member, you can borrow from a friend in the form of a borrowed down payment which the lender will need you to show that you can handle the repayment in order to qualify for the mortgage.
If you are contemplating using gifted funds for a mortgage down payment, please contact me directly to learn more.
Patrick Palmer: The Mortgage Cat
Licensed Mortgage Agent (Lic.#16000311)
South Oakville Centre, 1515 Rebecca Street, Unit c33, Oakville, ON L6L 5G8