The short answer is no…the long answer is maybe. When it comes to downpayments, it is possible for others to contribute part or even all of it. Lenders know that life is expensive these days and especially first time buyers may need a little help accumulating a full 5% downpayment and closing costs to buy their first place. That’s why they do allow what is called a “gifted downpayment” but the rules are pretty narrow. The gift must come from an “arm’s length” relative, so that means Mother, Father, Sister, Brother. So not Debbie, in this case.
Lenders are making very sure that the funds are definitely coming from one of these family members these days, as this was a huge opportunity for fraud in the past few years. Gifters will need to sign a gift letter that will state the exact amount of the gift and that the gift does not have to be repayed aswell as provide address and phone numbers for the lenders to call and verbally verify the information in the gift letter. Some lenders, although not all, will require verification of where the gifted funds are coming from, like Dad’s investment statement if it’s coming from his RRSP’s or a recent statement if he’s drawing it from his Home Equity Line of Credit. As the borrower, you will then need to show the lender the actual transaction of the funds being deposited into your bank account.
As mentioned, it is possible for the full 5% to be gifted by an arm’s length family member but as an applicant, you would want to be really strong in the other areas of your application. The lender will want to see that you have solid employment, good, established credit and that you’ve saved your own closing costs. This is actually a requirement as closing costs cannot be gifted. A lender would really like to see that you’ve saved atleast some of you’re own downpayment as it gives them confidence in your ability manage your money but if everything else on the application is strong, a fully gifted downpayment is usually allowed.
So what if Debbie is the only person that can help you with your downpayment? Well, the lenders have allowed for this via a product called the “Borrowed Down Payment” product. Lenders feel it is riskier to allow a friend or in this case, a friend of a friend, to provide a gift as the odds of them asking for the gift back in the future is much higher than Mom or Dad calling it in. Because of the additional risk, the lender needs to make sure that you can handle the repayment of those funds as part of the mortgage qualification process.
So you and the very generous Debbie would work out a simple loan contract and this would be provided to the lender. The agreed upon loan payment would be included with your other debts on the mortgage application and if you can qualify to carry the loan and the new mortgage, then Debbie will be approved as your “gift” giver. Because the gift is really being viewed as a “loan” that you are fully qualified to carry, anyone can be the provider of the funds under this program, including credit card companies, although we’d rarely advise this. Typically, most lenders offer the same interest rate on the “Borrowed Downpayment” product as a regular mortgage but you will probably pay a higher mortgage default insurance premium ( CMHC or Genworth). Again, you must be a fairly strong applicant in regards to employment and credit and you must show the lender that you have saved your own closing costs which are typically calculated at 1.5% of the purchase price.
If you are in Alberta and have a generous downpayment donor, please feel free to contact one of our Mortgage Brokers to discern which of these two programs suits your situation best and for more information about what both of you can expect from the mortgage application process.