One of the biggest things a person will ever save for is likely the down payment on their new home. This is a huge expense that often takes lots of time and dedication to save up for, but what if you had someone who could provide that for you? This is called a gifted down payment. Here are the key things you need to know about these gifts before you consider them.
What is a gifted down payment?
A gifted down payment means someone separate from the home buyer is providing the down payment on the property. This person must be an immediate family member of the buyer, such as a sibling, parent, or grandparent. It’s fairly common for parents to help their children enter the housing market by providing part, or all, of the down payment.
Down payments often range from anywhere between five and 20 per cent of the home’s purchase price, with some exceptions and limits. This means a gifted down payment will be tens of thousands of dollars at the least.
What does the donor need to provide?
A gifted down payment seems simple enough, but there are some key items the donor needs to provide in order for a lender to accept it. Here are the big things a donor needs to show.
A letter of confirmation
Gifted down payments must NOT be loans, and the donor cannot expect repayment. In this letter, the donor agrees the money is purely a gift, with no repayment required. This is because lenders don’t want the borrower to be in extra debt when they take on a mortgage. If you are meant to owe money to the donor as well as make mortgage payments, lenders may worry about your ability to manage your obligations to them. For this reason, lenders need proof in writing that this will not be the case.
Proof of the money transfer
Your gifted down payment will move from your donor’s account into yours. Your lender will need to see proof of this transaction taking place so they know your funds are ready to use. Most likely, both you and your donor will need to show proof of this event happening from both ends. This also confirms to the lender that the listed donor is, in fact, the person gifting the down payment. Having this knowledge confirms the funds came from a legitimate source and were not a result of activities like money laundering.
Proof of available funds
Your lender might ask the donor for proof that they have the funds to provide a gifted down payment. Once an extra person enters the mortgage process, it’s important for lenders to be able to understand their financial situation as well. After all, lenders do not want a borrower to rely on a gifted down payment, only to have it fall through and effectively ruin the purchase. Your mortgage broker will walk you through what the donor needs to do for this process.
What to consider ahead of time
How will this impact the donor’s finances?
Gifted down payments are big amounts of money. While it’s a very generous gift, the donor needs to carefully consider its pros and cons. On the one hand, the donor might be able to help their child or relative enter the housing market. This is certainly a good feeling, and it’s a great way to spend your money if you can afford it. On the other hand, however, donors must ensure they can afford it. It’s important for the donor to plan their finances and future around this action, because gifting a down payment is not a decision to make lightly. Donors have to make sure they are in a position to provide someone else with this money, without suffering themselves.
What is your budget?
If you receive a gifted down payment, you need to determine how it will affect your purchasing budget. For example, you might be able to contribute 20 per cent of the purchase price of a less expensive home. Alternatively, maybe you can expand your budget and reduce your down payment contribution. However, if you can save up that full 20 per cent, we recommend doing so. This lets you avoid mortgage default insurance, which adds another cost on top of your homeownership expenses.
Gifted down payments can be a massive help for many buyers who need a financial boost to enter the market. If you’re thinking about accepting a gifted down payment, make sure you reach out to a broker right away! We can walk you through the steps we covered in more detail to ensure your experience in the market is a successful one.
If you have any questions about your mortgage, get in touch with me!