Getting a mortgage with help from the bank of Mom and Dad

The bank of Mom and Dad

With the millennial generation in full force purchasing homes, the trend of gifted down payment from the bank of Mom and Dad has become apparent.  With the growing increase in qualification requirements and increasing home prices, it’s no surprise parents are now co-signing for mortgages or even gifting large amounts of down payment.  Genworth Canada’s First Time Home Buyer Survey 2017, showed that 9/10 first time home buyers are millennials, with 61 per cent of them putting down less than 20 per cent on the purchase of their first home!

Gift or assistance with down payment

As Mom and Dad know, it’s always better to be paying down your own mortgage than someone else’s!  Most parents of millennials are from the baby boomer generation, where the ideals of home ownership were a key focus.  It’s no doubt that Mom and Dad want their kids to be as successful as possible, and the hardest part of getting into a home is the money required.  When it comes time to plan your purchase, talk to your parents!  If you can discuss your financial plans freely with your parents, you are opening the opportunity for them to assist you in your goals.  Even if Mom and Dad don’t have the funds readily available, if they have equity in a property they can ultimately refinance and take out funds for your gift.

How does it work if you use a gifted down payment?

When it comes time to purchase your home, mortgage lenders have specific requirements on how gifted funds are handled.  When receiving a gift, it must be from an immediate family member. This means Mom, Dad, brother or sister.  You will need to show the lender the transfer of funds entering your bank account along with a signed gifted down payment letter.  The gifted down payment letter will state that the funds you are receiving are a gift that is not repayable by any means.  This is important as if the funds were a loan the lender would need to take the payment into account in your qualifications.

Co-signing

Another option for parents if gifting funds is not an option is the ability to co-sign the mortgage application.  There are many reasons you could want a co-signer, such as an increase in your purchase power or even adding credit strength to the application.  When your parents co-sign for your mortgage, they are responsible for the mortgage as much as you are.  This means if for any reason you cannot make a mortgage payment, your parents will need to make the payment or it can affect all parties’ credit scores if there was ever a missed payment.  This means with co-signing, your parents are taking on a bigger risk with their own finances.

Is there a time you wouldn’t want your parents to co-sign?

There are a few instances when adding Mom and Dad to the application wouldn’t add any benefit.  If Mom and Dad have a large mortgage or own personal expenses, they can actually reduce your purchase ability.  The other reason you wouldn’t want to add your parents is if they have a bruised credit score.

Here at the Clinton Wilkins Mortgage Team, we know that buying is a stressful time!  When it comes to purchasing your first home, spend the time and discuss your financial goals with your family to see if they have the ability to help with your purchase.  Why not leverage all your resources when making the biggest financial decision of your life?