The modern housing market in much of the world has made it nearly impossible for many people to get into the market on their own. In fact, most people were gifted some amount of money to help them get into the real estate market, both in Canada and in many parts of the western world. If you’re looking to buy a home and need help getting that 5% down payment (plus 10% of any amount over $500,000), then you need to know if you can be gifted that money, how it affects your mortgage application, and how to go about it in the best way possible. Here are some tips about gifted down payments that you need to know.
Gifted down payments can’t simply come from anyone, they have to come from someone that the lender considers “arm’s length.” This essentially means anyone in your nuclear family: parents, siblings, and little else. If the money is coming from someone else, it will likely be disallowed from being part of your down payment and your lender will likely disapprove your mortgage.
But that only covers what lenders call a “gifted down payment.” You can still acquire what they call a “borrowed down payment” from people outside of this very narrow definition of “arm’s length.” This would include friends and more distant relatives who want to help you in your home purchase. In this case, you’ll need to set up a contract between you and the person lending you the money, even if that money is still technically a gift. That way, the lender can determine through a paper trail whether or not you can handle the amount and a mortgage.
While getting 5% can be quite difficult in these modern times, you’ll still need to prove to any lender that you can handle the financial responsibility of your mortgage. Without that down payment, they will be less inclined to give you a good mortgage, or one at all, which is why the rest of your application will need to be absolutely top notch to help you secure the mortgage. This means you’ll need steady income, a great credit rating, and everything else that’s required for a mortgage. So if you’re gifted the money for your down payment, ensure you have everything else in order to prove to any lender that you can handle the mortgage.
A gifted down payment is a fairly common thing in this modern real estate market, but it does have some limitations. The first is where it comes from, but the other problem with gifted down payments is the insecurity it adds to your application. Be sure to make the best decisions possible when it comes to a down payment to ensure you can make the most of your first home.