How to Use Gift Money as a Mortgage Down Payment

Due to soaring interest rates and high house prices, many Canadians are struggling to realize their dream of owning property. The buyers who overcome these hurdles are often those who can turn to their families for assistance.

From 2015 to 2021, the number of first-time homebuyers who received financial gifts from the so-called “bank of mom and dad” increased from 20% to 28%, according to analysis by the Canadian Imperial Bank of Commerce.

The average amount of these down payment gifts also saw a meaningful uptick, climbing from approximately $50,000 to around $80,000 during the same time period, according to CIBC data.

A familial offer to help you buy a house may come as a tremendous relief, but it’s one to accept with your eyes wide open. There are certain rules and requirements to be aware of when using gift money as a down payment.

Who can give down payment funds?

In Canada there are no legal restrictions on who can make a gift of down payment funds. However, some mortgage lenders may insist that funds only come from members of your immediate family, like parents or grandparents. Gifts that come from friends or extended family may necessitate additional documentation of your relationship.

Above all, financial institutions want to be sure that the money is actually a gift, and not a loan that you’ll have to repay. During the approval process, mortgage lenders will look at your debt-to-income ratio and if the down payment funds are actually a loan, it may increase your DTI, making it harder to qualify.

How much can or should be given?

There are no legal limits on monetary gifts in Canada, and every little bit helps. But a bigger down payment makes it more likely that you’ll qualify for the mortgage you need at a competitive interest rate.

If you get the opportunity to discuss the gift amount with your family, keep minimum down payment rules in mind. For homes priced at $500,000 or less, you’re legally required to have a down payment of at least 5% of the property’s purchase price. For homes valued at $500,000 to $999,999, you’ll need 5% of the amount up to $500,000 and then 10% on the amount over $500,000. For properties valued at $1 million or more, you’ll need a down payment of at least 20%.

Nerdy Tip: Using a gift as a mortgage down payment is a bit trickier when you’re self-employed. Lenders may ask self-employed borrowers to prove that they can cover 5% of the home’s price on their own. Gift funds can be added on top of this amount, but can’t comprise the entire down payment.

Why giving a down payment is not the same as co-signing

Using gift money as a mortgage down payment is not the same as having a mortgage co-signer.

A down payment gift is a lump sum given at the beginning of the home-buying process. After signing off on the gift letter (more about that below) the giver’s obligations are over — they aren’t typically involved in mortgage application or search for a property, and have no responsibility to help with your other home-buying costs or mortgage payments.

Having a family member co-sign your loan means they do share responsibility for the mortgage, even if they don’t live in the house. If you miss or stop making payments, the co-signer may face financial consequences.

Lenders may ask for extra documentation

When using gifted money to make the down payment on a mortgage, there are two documents lenders typically want to see: a gift letter and proof of funds.

Gift letter for a down payment

A gift letter is a document that details information about the funds, such as who is making the gift and their relationship to you. The letter will need to be signed, notarized, and should include the contact information of those giving the funds. An official gift letter helps the lender confirm that the money is not a loan that might affect your ability to repay the mortgage.

Nerdy Tip: Ask your mortgage lender if they have a gift letter form that they prefer you to use.

Proof of funds

In addition to the gift letter, lenders will require proof of funds, which may include documents like a money order receipt or a bank statement. This documentation demonstrates that the gifted money has been successfully deposited into your bank account. The lender wants to be certain they can confirm the receipt of funds, ascertain the deposited amount and identify the source of the deposit. The lender wants to ensure transparency and compliance with lending regulations.

What to do if family can’t help with your down payment

A recent report by Statistics Canada found that people born in the 1990s to those who owned homes were twice as likely to own their own home in 2021.

The report also found a positive connection between parental affluence and the housing outcomes of their children, noting that one of the key advantages adult children of homeowners enjoy is the likelihood of receiving a down payment as a gift.

If your parents don’t own a home — or simply don’t have the ability to make a large cash gift — getting help with a down payment may not be an option for you. Going it alone as a first-time home buyer is definitely harder, but not impossible. To overcome affordability challenges you’ll need to be patient, financially prepared and aware of your assistance options.

While building a good credit score and keeping your debts under control, consider:

Opening a First-Home Savings Account: Use tax benefits to accelerate your down payment savings.
Researching the First-Time Home Buyers’ Incentive: An interest-free down payment loan.
Exploring the RRSP Home Buyers’ Plan: Put your RRSP savings toward a home purchase without paying penalties.
Looking for grants and assistance programs offered by your province or city.