As home prices rise, first-time buyers across Canada are feeling the pinch, and many are turning to parents or other relatives for help with their down payment. Recent data released by the Bank of Montreal shows that 30 percent of first-time home buyers expect to get help from family members, and in pricey markets like Montreal and Vancouver, that number is even higher: 40 percent!
Nationally, BMO found that the average first-time home purchase was $316,100, although this varies by province. In B.C., for instance, the average spend was $430,300, which is nearly twice the average in several other provinces.
Of course, money for a down payment cannot “magically” appear in the borrower’s account at closing time, so mortgage lenders want verification that down payment money either came directly from the borrower or as a gift from an immediate relative. If you’re a first-time buyer who’s getting help from family members with your down payment, here are a few things that you should know.
- Have a generous parent, sibling, grandparent, aunt or other immediate relative? Good for you! However, mortgage lenders typically won’t allow down payment gifts from family friends or bosses or other non-relatives. Sorry.
- Your lender may require that the person gifting the money provide a gift letter outlining the amount of the gift, the recipient, the giver’s relationship to the recipient and the fact that the gift is not subject to repayment terms. Sometimes parents or relative lend money for a down payment rather than gifting it, but lenders frown on this because it increases the borrower’s debt-to-income ratio.
- Some lenders require that the gift-giver share his or her banking history to show the origins of the gift money. If your parents are wary of sharing their financial information with you, they may be able to communicate directly with your lender rather than using you as a middleman. The gift should be deposited into your account so that it can be documented and the deposit should exactly match the amount shown on the gift letter to avoid potential issues.
- If a couple is buying a home jointly, the gift-giver may want to specify in the letter that the gift is intended for their grandchild, child, niece, etc. Otherwise, if a couple divorces, the down payment gift may be presumed to be for the benefit of both parties and split evenly between them. Obviously, nobody buys property with their spouse and anticipates a split, but if that happens, your relative may not want your ex-spouse to walk away with half of that money.