Did you know that you can use a gift from a family member to help you purchase a home?
Over a quarter of first-time homebuyers used gifts from their parents and nearly 10% of move-up buyers took advantage of this strategy in 2021 to help boost their down payment and land their forever home, despite the bidding war frenzy.
Many of those gifts did not come from their loved one’s retirement savings, but from the equity in their homes that was accessed through a refinance or reverse mortgage – a strategy that is helping families pass on wealth sooner than planned.
In this article, we’ll show you how to ask for a gifted down payment and how other Pineapple clients like yourself have used this strategy to help them start building wealth sooner than they had ever imagined.
Gifted Down Payment – What To Know
Who Can You Receive This Gift From?
Lenders will allow you to receive this gift from an immediate family member, which includes your parents, siblings, step-siblings, children, or grandparents. If the gift is coming from an aunt or uncle, it’s important to tell your mortgage broker so they can come up with an appropriate solution and determine if a lender will allow an exception.
If The Family Member Lives Abroad Can They Still Gift The Down Payment From A Foreign Account?
Yes, this is possible but there are additional requirements, including confirmation of the wire transfer, funds in the bank statements, and more due diligence is required. A Pineapple mortgage broker can assist you with this process.
What Sources Can This Gift Come From?
- Cash savings
- Reverse mortgage funds
- Refinance to access equity to be passed on as a gift
- Second mortgage on the property, cashed out and passed on as a gift
- Investments de-invested into a cash position
What Is Required From The Giftor?
The giftor will need to sign a gifted down payment letter issued by the lender. This letter will include:
- A statement that the gift will not be paid back and will not cause the recipient a financial burden.
- The donor’s contact details, the amount gifted, the date of the gift, and their relationship to the recipient.
- May require to provide 30-days of bank statements (lender specific).
What Is Required From The Recipient?
Typically, the recipient will need to provide 30 to 90-days worth of bank statements to show the receipt of the gift and any other sums of money over this period (lender specific).
Will Tax Need To Be Paid On The Gift?
One major benefit to Canadians is that there’s no gift tax required with a gifted down payment. You or your family member won’t need to pay any taxes on the amount as it’s considered non-taxable income.
Why Is It Important To Add In The Mortgage Agent Early?
Lenders will have different requirements when it comes to gifted down payments. They may only allow 5% being gifted for an investment purchase for example. Some lenders may have a maximum gifted amount that they allow. A Pineapple mortgage broker can ensure that you are placed with the right lender depending on your down payment requirements.
How To Ask For A Gifted Down Payment
- Have a Pineapple mortgage broker crunch the numbers first. This will arm you with the info you need to show your family member exactly how much gift you would need to purchase a home.
- Have the meeting in person. This will show your loved one that you’re serious and will also give you a chance to discuss the numbers and potential benefits face-to-face.
- Loop them into the process. Let them know your mortgage broker will also be working with them closely to ensure that any options discussed will not impact their long-term financial and retirement goals.
- Let them know if it doesn’t work out that’s okay too, not everyone is in a position to provide a gift, and there will be other opportunities down the road for them to be part of your home buying journey.
Avoid Saying Things Like:
“Mom/dad, the stock market has done well lately. Would you consider transferring some of the extra money you have made into my account to help me buy a home? I’d be forever grateful”.
“Have you heard about reverse mortgages? It would allow you to access some of the equity in your home to use as you wish and to help me buy my first home”.
The Smart Way To Ask For A Gifted Down Payment:
A better way to ask for a gifted down payment is to introduce the concept and then set up a call with the mortgage broker.
By letting the broker guide the conversation and outline all the options available to your family member to ensure that any decision made is the right decision for all parties involved and is one that protects your family member’s financial future as well.
“Hey [enter family member name], I was speaking with a mortgage broker about my potential to buy [my first/a new home] this spring. They ran some numbers and it looks like I’m really close but need an extra [$$$$$].
They mentioned some strategies that would help boost my down payment. One of these options was receiving a gifted down payment from a family member, another was using an RRSP strategy or borrowing the down payment.
I want to look at all avenues possible and would love to loop you into the process and get your advice. Would you be willing to meet with the mortgage broker and me online for 30-minutes to discuss these options so both you and I know what’s possible?”
Case Study For First Time Home Buyers
Case Study – FTHB
Kamal had been saving up for some time and was finally ready to buy his first home. After completing the Pineapple online pre-qualification and speaking with a mortgage broker, Kamal realized he didn’t have enough money saved to cover the closing costs, nor did he have much of a buffer if a bidding war arose or the appraisal came back under value.
Fortunately, his mortgage broker presented him with a number of options that would help boost his down payment and purchasing power. One of the strategies Kamal liked was using a gifted down payment. His parents were already planning to pass on their home to him as an inheritance, so he set up a meeting with his parents and his broker to discuss his options together.
Kamal’s parents were reluctant at first but soon learned that they could refinance their home and use the equity to not only help Kamal but also renovate their own home – something they had been putting off for years.
The broker explained they could also move the mortgage to a new lender to take advantage of better rates and terms, allowing them to pay their mortgage down faster. Best of all they wouldn’t have to touch any of their retirement savings, and the appreciation of their home would make up the difference in a few years’ time.
It was a win-win. Kamal received a gifted down payment from his parents refinance and purchased a home before the spring market picked up. And in the future, he’d still inherit their home, building his wealth even more.
Case Study For Those Buying A New Home
Kelly and Rob were quickly running out of space in their starter home. They were hoping to move up to a larger property but with the rising prices they had already lost multiple bids so decided to put their plans on hold until prices stabilized. That was until a mortgage broker called them and provided them with a useful tip – they could boost their down payment through a family gift.
This was something Rob had never considered before. He had talked to his parents about reverse mortgaging their home – something he thought would wipe out his inheritance and advised his parents against it. But after speaking with the mortgage broker, Rob realized he was misinformed. A reverse mortgage could in fact help his parents to age in place, provide them with the extra cushion they needed in retirement and allow Rob and his other brother to still inherit a sizable amount once the reverse mortgage was paid off.
Rob decided to loop everyone into the conversation to ensure they created a plan that worked for everyone. The parents agreed it was a smart move, and pulled out $500,000 – 40% of their equity – through the reverse mortgage, gifting $100,000 to both Rob and his brother, and leaving themselves with an extra $300,000 to enjoy throughout their retirement.
Rob and Kelly were finally able to put in a solid offer and win a bid on a forever home that met all the needs of their family. Rob’s brother was also able to get ahead by using the money to pay down some of his debts and contribute to his children’s RESP, giving him some welcomed breathing room.
Ready To Get Started?
A Pineapple Mortgage Broker can help you put a down payment strategy in place that will get you into homeownership sooner than planned.
Let’s get you into the spring market. Contact us today!
Need more downpayment strategy tips for First-Time Homebuyers? Click here
Need more down payment strategy tips for Second-Time Homebuyers? Click here