One way to keep the financing low in Canada is to use a mortgage gift letter to buy a home. To make full use of the letter, you need to follow some basic rules to proceed with financing.
What Is a Mortgage Gift Letter?
A mortgage gift letter represents a form that declares that your down payment has been given as a gift. By using this form, you are not under an obligation to return the money. In addition, the letter shows that you will not be under further financial stress, as the money has been gifted. By receiving the money, you can assure a lender that you are assuming less risk.
Therefore, using this strategy as a first-time buyer can bode well for you in securing a home mortgage. Even if you’ve bought a house before, a mortgage gift letter can help you prove that you’re serious about getting financing. After all, a lender wants to feel you owe your real estate solely to them.
So, what are the requirements for using this form?
Tips to Follow for Getting a Down Payment as a Gift
The following tips will give you the requirements for placing a down payment using this method.
- The mortgage gift letter and down payment must originate from an immediate member of the family. Therefore, the donor may be a parent, sibling, or grandparent. Sometimes, borrowers may ask a cousin or uncle for the down payment. However, in most instances, it is best to ask for the money and letter from an immediate member of your family. You cannot get a friend to give you the cash for the down payment.
- The person giving the gift does not have to provide his or her bank account. The lender only needs to see that the gifted down payment is in your account. Plus, it does not make any difference if the donor obtains the funds from his or her savings or a line of credit. As long as the donor is an immediate family member, he or she does not have to provide bank account details.
- The mortgage gift letter is a templated form that is prewritten to conform to the lender’s requirements for financing. You, yourself, as the borrower, do not need to draft the letter from scratch or download a letter online. You only need to obtain a gift letter from the lender and add the donor data, including the gift amount and the date the donor transferred the cash gift to your bank account.
- The gift letter template provided by the lender will show that the down payment is a gift that does not need repayment. Your broker, lawyer, or banker, legally, cannot hear, verbally, that the gift is a loan. Otherwise, they must inform the lender yjsy the amount is a loan has not been presented as a gift – something that could make things messy financially for both for the lender and borrower.
- The gift letter is typically good for 3 months, or 90 days. If the history of bank account activity lasts longer than 90 days, a new gift letter may be requested. However, most gifted funds are transferred within 90 days, so this is normally not a cause for concern. Most lenders should see the gifted funds in a borrower’s account approximately, or at least, two weeks before the deal closes on the real estate.
Are the Gifted Funds Taxed?
Because Canada does not have a gift tax, you can receive money from an immediate family member, via a mortgage gift letter, and not get taxed on the money.
Filling Out the Gift Letter: What It Should Include
When filling out the gift letter information, you need to include the following details:
- Your name (mortgage borrower)
- The giftor’s name (donor) and their name, address, and phone
- The donor’s relationship to you
- How the money is being donated
- The address of the real estate
You also need to include a statement that says the gift does not have to be paid back, clarifying that the money is actually a gift.
Example of Templated Mortgage Gift Letter
Below is an example of a mortgage gift letter:
Questions about the Mortgage Gift Letter and Payment
How is getting a mortgage gift for a down payment different if you are self-employed?
Things can get tricky if you ask for a gift for a down payment and you are self-employed. In this case, you need to provide 5% of the home purchase price yourself with the gift for the down payment covering the rest of the cash, or 15%. If you are employed full-time, you can receive the full down payment as a gift.
What should you do to prepare for mortgage qualification?
While you can make it easier to finance a home by using a mortgage gift letter, you still have to show the lender you have a good to excellent credit score. Before you apply for a loan then, make sure you take care of any negative entries on your credit report. Present yourself to the lender in a way that makes him or her feel motivated about approving you for the loan.
What questions should you ask before seeing a lender?
- What is my credit score?
- If my credit score is lower, how can I improve it?
- What is my debt-to-income ratio?
- Can I add extra debt and handle it?
Final Thoughts
Focus on all those things that will make approval a more positive experience. If you have an immediate family member willing to gift you the down payment, then, by all means, use that resource as well.
Written by:
Amy Orr is a professional writer and editor with over 10 years of experience in the Canadian, U.S. and U.K. financial markets. She has written for numerous publications on topics as diverse as economic literacy, corporate finance, and technical analysis of numerical data. Prior to transitioning to full-time writing, she worked in the hedge fund sector. Her academic background is astrophysics, and she has a Masters in Finance from the University of Edinburgh Business School.
