The latest stats from Mortgage Professionals Canada show down payment gifts from parents have doubled since 2000 — going from seven per cent in 2000 to 15 per cent for homes purchased between 2014 and 2016.
One of the first rules when it comes to gifted down payments is that it must come from an immediate relative. It also should be noted that this gifted down payment is supposed to be a genuine gift that should not have to be repaid to the family member giving it.
The family member gifting the money maybe required to sign a letter confirming that. The lender might also verify bank records of the amount that is being transferred to the buyer.
For Self employed applicants that are stating their income, at least 5% of the minimum 10% down payment must come from the buyer’s own resources. Another thing to consider is that even with a gifted down payment, a lender will always look at the prospective borrower’s financial picture.
Gift of Equity
This is a legitimate form of a down payment on a house. How a gift of equity works: let’s say you wish to buy a home they are living in or wish to move into. The house is in a mom or dad’s name or it is a close relative and the borrower does not have money for a down payment. If the owner of the home is willing to gift you the equity of the home, this amount can be used as a down payment on the home.
An example of this might be a family wants to purchase a home, the price of the home is $100,000 and is agreed upon. A gift of equity can be 5% or more, depending on the borrower’s application and current financial situation. Let’s say the home owner/family member completes a “gift” letter, stating equity is a gift, not owed back. For the example let’s say the gift of equity is 5%.
$100,000 – $5,000 (5%) = $95,000 + 2,755 (CMHC) = $97,755 mortgage amounts [seller receives $95,000 at closing]
Instead of your family handing you a gift of cash for down payment they hand you equity and still receive the same amount of money on closing day.