“Can I give someone the down payment to buy my house?” Although it’s not always a straightforward answer, this question presents itself fairly often. And the answer is usually no… except in one circumstance, but we’ll get to that later. Here, we play out a few scenarios about giving someone a down payment.
“I am selling my house on ComFree. I have someone who is interested in purchasing my property, but they don’t quite have the full down payment. Can I give them part of the down payment to help them out? I REALLY need to sell my house! Does the bank really care where the down payment comes from?”
Let’s establish why the lender cares about where the down payment comes from. There are three main reasons.
Firstly by law, they have to. In order to prevent money laundering, lenders have to prove the source of the down payment on the purchase of a home. Acceptable forms of down payment are from own resources, borrowed (through an insured program called the FlexDown), or gifted from an immediate family member. To prove the funds are a buyer’s own resources, lenders require a 90 day bank statement. This indicates the money has been in the account for 90 days, or it shows an accumulation of funds through payroll deposits.
Secondly, the lender cares about the source of the down payment because it indicates the buyer is financially qualified to purchase the home. Obviously, a down payment from own resources is best. This shows that the buyer has a positive cash flow, is able to save money, and manages their finances in a way that they will most likely make their mortgage payments on time. The bigger the down payment, the better (as far as the lender is concerned). There is a direct correlation between how much money someone has as equity in a property, and the likelihood they will/won’t default on their mortgage. To break that down, the more skin you have in the game, the less likely you are to walk away.
Thirdly, the down payment establishes the loan to value ratio. Now, the loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95 per cent of a property’s value. In other words, they can’t lend higher than a 95 per cent LTV. This means that if someone is buying a home for $400k, the lender can lend up to $380k. The buyer is then responsible for coming up with the last 5 per cent or $20k.
So, how does the source of the down payment impact LTV?
Great question. To answer this, we have to look at how to establish a property’s value. Very simply put – something is worth what someone is willing to pay for it, and what someone is willing to sell it for. Of course, this assumes no external factors come into play. When you are dealing with real estate, it’s usually compared to what people have agreed to in the past on similar properties. So, if you are selling your house for $400k and you give the $20k down payment to the buyer, the actual sale price is actually $380k. Taking the purchase contract in to the lender and requesting a mortgage for $380k would actually be a 100 per cent LTV. The lender would then decline the financing.
Despite how people attempt to rationalize or maneuver wording and money, its all smoke and mirrors. If the buyer isn’t coming up with the money for the down payment independent of the seller, it impacts the LTV and financing will not be completed. Here are some example scenarios:
“Can I increase the sale price of the property I’m selling and “gift” the down payment to the buyer? This way, they have a bigger down payment and it looks more favourable to the lender.”
Nope. Again, this is a trick to try and manipulate the LTV.
“If the buyer wants my house really badly, but doesn’t have the full down payment. Can they borrow the money from somewhere and then we provide them with a cashback at closing to repay the debt?”
No. ANY cash back from the seller to the buyer when the purchase transaction closes is a no go. Just like on the front end of the purchase, any money refunded or given back on closing impacts the LTV. This would impact the mortgage lender’s decision to lend.
“But what if the lender doesn’t know about it?”
This is called fraud. Having conditions to the sale of a property that are not disclosed to the lender is fraud.
“You mentioned there is one way to give someone the down payment to buy a house. Tell me more!”
As mentioned, there are three acceptable sources for a down payment. One of them is as a gift from an immediate family member. So, if you are selling your property to an immediate family member, you are able to gift the equity to them on the purchase contract. You would write that condition on the actual purchase contract. You would then complete a gift letter indicating that the down payment is a true gift, and has no schedule for repayment.
So, there you have it. If you are selling a house to someone you are not directly related to, you are not able to give them the money for your down payment. Alternatively, if you are buying a house from someone you are not directly related to, you are not able to take money from them for the down payment. If anyone tells you otherwise, they are misinformed. And if anyone ever presents a way to “get around the rules,” it’s probably fraud.
If you have any questions about this or anything else mortgage related, I would love to talk with you!