If you’re a buyer on a tight budget, your family may be able or willing to help you with your down payment. If that’s the case, lucky you!
I know financial support from family is not an option for every buyer and I have many articles about other options on my website, but if you do fall into the category of getting downpayment money from your family, this is a useful guide.
The first thing to decide: should you or shouldn’t you accept their help?
It’s help that many first-time buyers do welcome, especially if coming up with a down payment or qualifying for a lower interest rate is going to delay their dream of home ownership.
If you have willing family members who have the finances or who may want to see you enjoy your inheritance now, then it’s worth the time to see if this is a viable financial option for you (and them).
The big question is whether it will be a gift or a loan. These are two very distinct options and are handled differently from beginning to end.
You and your family members will want to consult with experts on tax law and real estate law so that all the “i’s are dotted” and the CRA won’t be questioning this intrafamily agreement.
It’s a Gift — Tax Free
A gift is just that, a present with no strings attached. It’s not a loan at all or even considered income. And you do not have to pay back anyone. Ever.
In Canada, there are no taxes on gifted money and it can be a useful way for parents or a family to reduce their estate and avoid other tax costs later in life or after death.
However, you and your parents or other family members still need to follow some guidelines to avoid any tax implications and still meet lender requirements.
Of course, check with your own accountant to double check your specific tax implications, but there are a couple of things to know:
• If the gift was given to a child who is already married or gets married while living in the home purchased with gifted funds, and a divorce occurs, that money will be considered as part of the matrimonial estate, and 50% could end up going to the ex-spouse, even if they didn’t contribute anything to the down payment.
• If the gift is recent and is for the sole purpose of buying a home, a lender needs to see a signed agreement from the parents stating that they have given their child a specific amount of money as a gift and don’t expect repayment.
In this situation, a lender wants the buyer to prove the origin of this new lump sum of money, which is usually put toward a down payment. The lender needs to fully understand any borrower’s complete finances and any risks, and this letter assures them that you are under no obligation to pay back this gift.
Parents or a family member can send the money directly to a real estate lawyer. That amount needs to match the amount stated in the letter. Many family members who lend money this way are happy to know that they are helping you buy a home and have some control over where the money is going.
I’m not a licensed accountant, so be sure to check with yours about what the tax implications might be for you and your family.
Intrafamily Loan- The Bank of Mom and Dad
Rather than gifting money, a family member can lend you money to purchase a home. That means you do have an obligation to pay back this money.
It’s a little more complicated to set up this family loan, but it can be a win-win for both sides:
• The benefit of an intrafamily loan is that you can get a lower interest rate than what’s currently available for a 25-year fixed-rate mortgage loan. And, your parents can earn more money on the interest from this loan than if their money was in a savings account or GIC at their local bank.
See how it can be a pretty good financial transaction between you and your parents or between you and another family member?
Keep in mind that there are certain strict requirements you and your family need to ensure that comprehensive and legally binding loan documents are drawn up. You should meet with a real estate attorney to draw up these documents and set up appropriate rates, payback requirements, etc. This is also important to consider from a divorce perspective, as these documents will help protect your parents, and the loan should a divorce occur.
So if you don’t qualify for the best rate from a bank, then maybe a family member could agree to lend you money at a lower rate to cover some of your mortgage or all of it. Plus, this loan won’t have fees or mortgage insurance that can increase costs for you.
Co-signing is also another avenue to consider if you don’t qualify for a loan on your own. Keep in mind, that your co-signer's credit needs to be in good standing as well and that if mortgage payments are not made on the loan, it will impact their credit score as well as yours.
Email me here with any questions about having family members help with financing your home purchase. Many buyers have done this before and I can give you more guidance on family gifts and loans.