What is a gift letter?
A mortgage gift letter is a notice from your donor declaring that the down payment funds have been given to you as a gift.
It shows a mortgage lender that you're under no obligation to return the money.
The lender wants to know that when you agree to make your monthly home loan payments, you won’t face the additional financial stress of having to pay back the donor. That could make you more prone to falling behind on your mortgage.
Mortgage lenders prefer that you owe your house to them and no one else.
The donor has to be an immediate family member, like a parent or a crazy rich uncle, and your lender may require proof that the money has been transferred into your bank account.
More: Best mortgage lenders in Canada
How much home can you afford?
Will I pay taxes on the gifted money?
There is no “gift tax” in Canada; your donor can give you as much money as they want without incurring any taxes.
In the United States, though, the limit is $15,000 per year before the tax man gets involved.
Down payment gift letter requirements and template
The gift letter must include the following:
- Name of the mortgage borrower.
- Donor's name, address, and phone number.
- Donor's relationship to the borrower.
- How much is being gifted.
- Statement that the gift is not to be paid back (after all, then it's not a gift!)
- New property's address.
Here's a good mortgage gift letter template you can use:
To whom it may concern,
I, John Doe, hereby certify that I will give a gift of $5,000 to Jane Doe, my sister, on Jan. 1, 2020 to be applied toward the purchase of the property at 123 Main Street.
I certify that this payment is a gift and that there is no obligation, either expressed or implied, of repayment. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker.
I have given the gift from the account listed below, and have attached documentation to confirm that the money was received by the applicant prior to settlement.
The source of this gift is:
[Type of account]
[Name of financial institution]
321 Avenue Street
(123) - 456 - 7890
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Down payment gift rules and restrictions
Unlike the United States, Canadians don't have to fear a "gift tax". You can be gifted any amount of money at any time with no tax implications.
For conventional mortgage loans, a down payment gift typically must come from a family member. Anyone in a special relationship with the homebuyer — such as godparents or close family friends — must provide evidence of the relationship and there's no guarantee that the lender will accept the letter.
And then things get tricky if you're self-employed. When applying for the loan you need to come up with 5% of the purchase price on your own, and then gifts can cover the remaining 15%. The full down payment can be gifted if you’re employed full-time.
It's important to remember that although 100% of your down payment can be handled by family, you still need to impress the lender with an excellent credit score and solid income to show that you can handle the payments.
To keep those payments low, an online broker like Homewise can help you find the best mortgage rate.
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If you're in the market for a new mortgage, or if you're looking to refinance before interest rates rise again, go to Homewise now and answer a few simple questions to get started.