Owning a home is a major milestone for many Canadians, but the financial hurdle of coming up with a sufficient down payment can be a significant barrier. To address this, some aspiring homeowners turn to the concept of a gifted down payment – a strategy that can make homeownership more accessible.
A gifted down payment involves a third party, typically a family member, providing funds to cover part or all of the down payment required to purchase a home.
One of the key considerations is the source of the gift. Lenders often require a letter from the donor confirming that the funds are indeed a gift – and not a loan that has to be repaid. The relationship between the homebuyer and the donor can impact the lender’s decision, as some institutions may have restrictions on the type of relationships deemed acceptable.
While a gifted down payment can ease the upfront financial burden for homebuyers, it’s important to note that it doesn’t exempt you from meeting other mortgage approval criteria. Lenders will still assess the borrower’s creditworthiness, income and overall financial stability.
In recent years, the housing market has witnessed increased scrutiny from regulatory bodies aiming to ensure responsible lending practices. This has led to tighter mortgage qualification rules impacting the eligibility criteria for borrowers, even those benefiting from a gifted down payment.
Homebuyers considering this strategy should work closely with their mortgage agent to navigate the complexities of the process. Additionally, seeking legal advice can help all parties involved understand their rights and responsibilities, ensuring a smooth and transparent transaction.
How much of a down payment is required?
The minimum down payment across Canada is 5% of the purchase price for a property valued at $500,000 or less and 10% for the portion of the purchase price above $500,000 regardless of whether you’re buying your first home or you’ve purchased multiple properties in the past.
Unless you have mortgage loan insurance, however, you must make a minimum 20% down payment. In order to qualify for mortgage default insurance, the down payment has to come from your own resources. One exception is if the down payment is gifted from an immediate relative. Not all lenders accept gifted down payments and, as mentioned above, there are clear guidelines on who can provide the funds to you, but your mortgage agent will know which lenders offer this option and their rules.
A gifted down payment can be a game-changer for first-time homebuyers. And thoroughly understanding the rules, responsibilities and implications involved is crucial to making informed homebuying decisions.
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