November means it's financial literacy month! Here, we talk about what you should expect from us throughout the month of November!
Talking about gifted down payments.
The number of Canadian millennials wanting to buy a house is on the rise. That being said, the price of buying one is too!
Although we Canadians can have a decent lifestyle with even minimum wage, it is not an easy task to save money with expenses overflowing. Even with a balanced budget, we have to deal with our recurring expenses. Expenses such as paying off college loans, your monthly rent, food expenses, car loan, and more.
Young working professionals seek to build their careers and life in the bigger metropolitan cities of Canada. Toronto, Vancouver, Montreal and Halifax are endowed with work opportunities. But, saving down payment to buy a house in these cities is a challenge by itself. Here, we talk more about what you should know about gifted down payments!
What are my options?
Many first-time homebuyers leverage a gifted down payment to help buy their first home. A gifted down payment usually comes from a family member by helping pay either a portion of the entire down payment as a gift. In most cases, lenders will require that the gifted funds come from an immediate family member.
How do gifted down payments help?
As a first-time homebuyer, it would be prudent to understand all about down payments and mortgages before you actually apply for it. Gifted down payments can be a major relief to you if you don’t have the necessary money to settle the entire down payment.
In Canada, you can typically buy your first home by paying 5% down. However, it is advisable to put in 20% down. Because, when you pay less than 20%, you are obliged to purchase mortgage insurance. Let’s say if you can pay 5% of the down payment, and your parents gift you the remaining 15%, your total is the favoured 20% Now, your monthly mortgage is lower and you save on mortgage insurance.
Remember, it’s a gift, not a loan
Gifted funds mean that you are not obligated to repay the person gifting you the money. Your lender doesn’t want to lend money to someone who not only has to pay a mortgage but owes a separate debt to a family or friend. It’s an important distinction that proves that you do not have any other debt obligations when applying for a mortgage. To qualify for a gifted down payment, the process varies slightly from lender to lender. You will want to make sure to speak to an unbiased mortgage professional when considering buying your first home. Some of the things your mortgage professional will help you prepare.
Donor letter outlining the gifted down payment
Your donor will need to sign a letter stating that the down payment is a gift. Therefore, meaning they don’t intend to receive it back. The letter would state their relationship, the amount gifted, the donor’s contact details and the property being purchased. Another way to strengthen the application is if your parent’s sign as a guarantor for your mortgage.
Proof of funds transferred
Your lender is going to ask both you and your donor to show that your gifted down payment has been sent and received to your bank account. Just an added security for them to know that the money is available to pay. This also validates that the money available for your down payment was gifted, and not received from other sources.
Proof of source of funds
Sometimes, lenders may require proof of the source of funds from the person gifting you funds. This is not applicable in all cases, but it provides the lender with another form of verification. This proves that the money did come from the person you said it did. Due to financial regulations around Know Your Customer (KYC) and Anti-Money Laundering (AML), your lender may ask questions about the funds if the source is questionable. You may face issues when accepting international funds to use as your gifted down payment. Therefore, It’s important to have your documents in order. Your mortgage broker will let you know exactly what you need!
Factors that can impact your approval
As helpful as gifted down payments can be, there are many rules and criteria each lender will review to be sure the downpayment is eligible. We’ve said it before, but you should always speak to an unbiased mortgage professional before you start your search for your first home.
Your credit score
Your credit score is the biggest factor that might influence the decision of the lender, regardless of the source of your down payment. Even if you are lucky enough to receive a gifted down payment, your credit score will impact the terms of your loan. You need to make sure that the rest of your application is strong, otherwise you may need a larger down payment outside of your gifted funds.
You don’t have money for closing costs
Even if your relatives can cover the entire down payment, you need to prove that you at least have funds to pay for the closing costs. Your closing costs cannot be gifted. It’s a reassuring factor for your lender that you aren’t completely dependent on your parents or siblings to pay for the house.
You have previously faced bankruptcy
Unfortunately, some lenders get spooked when you have faced bankruptcy in the past. Lenders won’t trust your application to be credible enough if you were charged with bankruptcy. Generally speaking, you still have options. However, you should speak to an unbiased mortgage professional before starting your search for a home. You will most likely need to be 2-3 years clear of your bankruptcy for lenders to consider your application. Your mortgage broker will help you plan how to get back on track and prepare for buying your first home.
One final benefit of gifted down payment in Canada is that they are not taxed, which helps you buy your first home without worrying about tax complications. When looking to buy your first home, gifted down payments are common. This extra assistance can help you get started on the right foot. In some cases, it can help you make a 20-percent downpayment to avoid paying extra for mortgage insurance. In others, it will still help you reduce your mortgage payment and buy your first home sooner! When planning on buying your first home and need advice on your down payment, get in touch with us at Clinton Wilkins Mortgage Team! You can give us a call at 902-482-2770 or get in touch with us here!