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Let’s imagine you’re ready to buy your first home and take advantage of low mortgage rates. But you don’t have enough money in your bank account. What could be the best resource of urgent cash? If you don’t have enough money for a down payment, family members are the best resource to assist you.
This assistance will require a “mortgage gift letter.” Don’t know what that is? Let us define it for you in detail.
A mortgage gift letter is a document signed by your donor stating that the money for the down payment was given to you as a gift. It demonstrates to a mortgage lender that you are not obligated to repay the money. The lender wants to know that if you agree to make your monthly home loan payments, you won’t have to worry about repaying the donor as well. This could put you at risk of defaulting on your mortgage.
In simple terms, a gift letter is a note from the giver stating that you are not required to repay the money. You’ll need the donor to send a gift letter to your mortgage company. This letter will state that the money is a gift, not a loan and you’re utilizing gift money for part – or all – of your down payment.
Mortgage lenders prefer that you owe only their money on your home. Your lender may want verification that the money has been placed into your bank account, and the donor must be an immediate family member, such as a parent or a crazy rich uncle.
Is Mortgage Gift Letter Taxable?
The short answer to this is No. There is no “gift tax” in Canada; your donor can give you as much money as they want without incurring any taxes. However, in the United States, the limit is $15,000 per year before the taxman gets involved.
Mortgage Gift Rules and Regulations
Canadians, unlike Americans, are not subject to a “gift tax.” You can be given any amount of money at any moment without incurring any tax consequences.
A down payment gift from a family member is usually required for conventional mortgage loans. Anyone who has a special relationship with the homebuyer, such as godparents or close family friends, must produce proof of that relationship, and the lender may or may not accept the letter.
When you’re self-employed, things grow much more complicated. When applying for the loan, you must come up with 5% of the purchase price on your own, with the rest 15% covered by presents. If you work full-time, you may be able to gift the entire down payment.
Top 5 Things to Know About Gift Letters in Canada
It’s crucial to note that even if your family can cover the entire down payment, you still need to prove to the lender that you can handle the payments by having a good credit score and a steady income.
1. The present must be from a member of one’s immediate family. Parents, siblings, and grandparents are all examples of this. An uncle or cousin may be used in exceptional circumstances, but the money is better donated by a close relative. A gift letter from a friend is not possible in Canada.
2. The bank account of the giftor (the person delivering the gift) is usually not required to be shown. In other words, the lender only needs to see the gifted monies in the account of the buyer (giftee). It makes no difference if the monies came from a credit card or savings. If the giftor is a close relative, the gifter’s accounts are normally not required to be disclosed.
3. The gift letter is a pre-written document customized for the mortgage lender or bank that is funding your home. You don’t have to write your own gift letter in Canada or find one online. It’s as simple as completing the lender template with the giftor and giftee information, the gift amount, and the date the gift was transferred into your account.
4. The gift letter template will explain that the money for the down payment is a gift and that they do not need to be repaid. Your banker, broker, or lawyer cannot hear that a gift is actually a loan; otherwise, they must advise the lender that it is a loan, not a gift, as required by rule of law. Indeed, the goal must be that the provided monies are not a loan; otherwise, the quality of the application will be misrepresented, thus putting the borrower, lender, and our financial system in jeopardy.
5. What is the duration of the gift letter? 90-day history of bank account activity is technically required by the lender. If the gift money was given more than 90 days ago, further account information may be required, as well as a fresh gift letter if one was written 90 days ago. However, because most gifts are made within 90 days, this is not an issue.
It’s also worth mentioning that most lenders require the gifting monies to be in the buyer’s account at least two weeks prior to the closing date.
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