Did you know that roughly 30% of Canadian home buyers get help from a parent or family member when making a down payment? Coming up with the funds to buy a home isn’t always easy, which is why receiving support from family in the form of a “gift” or as a co-signer can offset some of the burden and help with affordability. Here’s what you need to know about buying a home with the help of a family member and what’s involved.

What is a gifted down payment?

Simply put, a gift is money that is given to you by a parent or family member with the intention of using it toward your down payment. Receiving gifted funds means that you are not obligated to repay the person and that it’s in fact, not a loan. 

If you receive a gift, you’ll need a gift letter. 

When receiving a gift from a family member, you’ll need to provide your lender a gift letter. This letter should outline who your family member is and the amount they’re giving you, along with an explanation that the money is being used for your home purchase. The purpose of this document is to assure lenders that this money isn’t a loan and that you don’t have any debt obligations. At the end of the day, having debt could impact your debt-to-income ratio and the chances of getting approved for a mortgage. This is why lenders want proof that the gift has no strings attached. 

A proper gift letter should include:

  • The gifter’s name, address and phone number
  • The gifter’s relationship to the recipient
  • The dollar amount of the gift
  • The date the funds were transferred
  • A statement from the gifter that no repayment is expected
  • The gifter’s signature
  • The address of the home being purchased

What is a co-signer and how does it help? 

There are other ways a parent or family member can help you with your home purchase such as becoming a co-signer. A co-signer is someone who applies for a mortgage loan with you (the primary borrower) and legally agrees to take liability on the mortgage and pay off the debt if you can’t make payments. Oftentimes, a co-signer is used when a home buyer is lacking in areas such as a strong credit score or steady, sufficient income. This is a great way to boost your affordability when buying a home, as your parent’s or family member’s income gets combined with yours to increase your chances of mortgage approval.  

However, it’s important to remember that having a co-signer isn’t something to take lightly. Your co-signer will be on the title of your home and has full responsibility if you stop making your mortgage payments and/or can no longer afford them. The last thing you want is to put your family in any financial distress or inconvenience, which is why determining your budget and searching for homes that you can afford over the long term is key. 

Whether you need a hand creating a gift letter or want to learn more about getting financial support for your down payment, our team of dedicated Mortgage Advisors are here to help. At Homewise, we guide Canadian home buyers through the mortgage process so that they can make the best decision. If you’re ready to start the process, get pre-approved in just five minutes or check out our mortgage affordability calculator to get insight on your maximum home affordability with a co-applicant or on your own. 

Check out this video from our MORTGAGE ACADEMY series to learn more about receiving a gift and what it involves.