Using Gift Funds for Your Down Payment
Zach Silverman | September 22, 2023
You want to buy a house, but you may not have enough money saved for a down payment and closing costs. One alternative strategy for down payment and/or closing cost is using gift funds.
If you have saved a little money and you have someone willing to gift you the money to help with your purchase, you are closer to your homeownership goal!
What are Gift Funds?
Gifts funds in the mortgage world is money that is gifted to a borrower to put towards a home purchase. The key word is “gift”. The reason the money needs to be gifted is that lenders do not want you to “borrow” and have to make payments elsewhere just to get the down payment money to purchase a home.
Who can Gift Funds?
An immediate relative. Mostly we see gift funds come from a parent or a grandparent, but it can come from borrower’s spouse, child, sibling or from any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.
Gift Fund Home Purchase Guidelines.
- The party providing gift funds must have NO affiliation with the builder, the seller, the real estate agent, or any other party in the transaction.
- Gift money can be used for your down payment, your buyer closing costs or required reserve funds.
- There is typically no limit to the amount of money that can be gifted as a down payment. There still may be loan programs that require a certain percentage of down payment money is saved by you. When you are getting pre-approved for a home loan make sure your broker knows if part of the down payment is being gifted or what part is coming from your other sources (i.e. your savings).
- You will need to provide documentation of who is gifting you the money and the paper trail. The first will be a signed gift letter outlining the names of those granting and receiving the gift as well as their relationship and the amount being gifted. Each lender has their own format so your mortgage broker will provide that template letter to you. Accompanying the letter, a copy of a bank draft or a bank statement showing the money transferred into the account, at least 15 days prior to the closing date.
Seasoned Funds.
If your parents or another approved gift donor has given you gift money in advance of a purchase, the easiest thing is to let the money season in your bank account. Seasoned funds are money that has sat in the bank account for at least 90 days. You will be asked for three months of bank statements showing the full amount that has been sitting in the bank account. Seasoned funds are considered your money and will not require sourcing even though it is technically a gift.
Are there Tax Consequences to Gifted Funds?
Canada is one of the few nations that don’t have any tax implications towards an immediate family member’s gift. A parent is able to provide their children a monetary gift without any tax implications on either side.
Consider gift funds as a means that can supplement your down payment for your house purchase goal. It would be a pleasure to help you with your pre-qualification. Please connect with our team here at Silverman Mortgage Group anytime!
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