If you’re looking into purchasing a new property, sometimes the financial pressure to come up with a down payment (not to mention all the closing costs, lawyers fees, etc) could be quite nerve-wrecking. If you are lucky you might have a relative that is willing to gift you some money for your down payment. This is very common for first time homebuyers, especially couples that are just getting married and well obviously will be receiving lots of gifts. A gift letter is a valid and effective way to help with the down payment of a property, but is only acceptable by Canadian lenders upon the following five conditions:

1. THE MONETARY GIFT S GIVEN BE A DIRECT RELATIVE:

   This essentially means that all funds that are given for the purchase of a property must be done so by a direct relative such as a mother, father, sister, etc. Although you may have a very generous naighbour, they are unable to give you the funds – unless they of course are directly related to you.

2. THE MONEY IS TRULY A GIFT:

   A gift letter is ONLY acceptable if the money does NOT have to be repaid, and the money is a true gift from a direct relative. Lenders will stop the mortgage process in its tracks if it looks suspicious that the money is being borrowed rather than given.

3. THE REASON FOR GIVING A MONETARY GIFT IS NOT DUE TO INTEREST IN THE PROPERTY:

   Basically, the person giving you money can’t be interested in eventually obtaining your property for their own benefit. This doesn’t mean they can’t come and visit, but they can’t think they have any interest (direct or indirect) in the property for themselves.

4. THE MONEY MUST BE DEPOSITED INTO A CANADIAN BANK ACCOUNT UNDER THE CLIENT’S NAME:

   This rule is golden, and applies to not only the conditions of a gift letter, but a down payment in general. Lenders do NOT like seeing large sums of money being moved around into different accounts, and there is no exception to a gift letter. Gifted funds are preferred to be deposited into client’s account by at least 90 days prior to purchase’s closing date.

5. THE GIFT LETTER MUST BE ACKNOWLEDGED BY BOTH DONORS & PURCHASERS:

   Both parties are to sign the gift letter to acknowledge and understand that the financing gift must be in the purchaser’s possession prior to the time of application for mortgage and as well confirmation of gifted funds transferred to client’s account. Donors are also to leave their contact information on the gift letter in case the lender needs to verbally confirm anything related to the gifted funds with them.

   Having a mortgage professional helping you through this is recommended because it’s easy to forget about small details when there are a lot of variables to consider.

What NOT to do once you have a mortgage pre-approval

Lenders look at a huge amount of information regarding your financial history when making a commitment to offer you a mortgage. Follow these five steps to ensure that your lender doesn’t revoke their mortgage approval, leaving you without your dream home.

1. Do NOT Make Frequent Bank Transfers.

   When lenders start seeing that large sums of money being transferred in and out of accounts periodically, there is a red flag that is raised. To be sure that a lender will not deem you as a ‘suspicious’ borrower, ensure that all your finances are managed within a few accounts and DO NOT TOUCH THEM. A lender would much rather see two bank statements totaling one down payment rather than one bank statement with money taken out, put back in, taken out again, etc.

2. Do NOT Make a Sudden Career Move.

   Lenders require up to three years employment information in order to approve for a mortgage. It makes it a lot more difficult if a borrower embarks on a new career opportunity 2 months down the line, especially if a smaller salary or varying work hours are expected. It would be best to talk to a mortgage professional to see what your options are.

3. Do NOT Go Bank to Bank Shopping for a Mortgage.

   This is especially true if you choose a mortgage professional. By shopping around, other lenders have the ability to pull your credit, which can have a negative impact on your credit score. A quick drop in credit score is also a red flag to lenders, and should thus be avoided.

4. Do NOT Surprise Your Mortgage Agent By Hiding Any Critical Information.

   They don’t have to know what you ate for dinner last night, but with regards to any financial information, name changes, or any legal information – it is best to be upfront. An example would include letting your mortgage professional know about an existing mortgage on your property right now, especially any co-signers involved. Not notifying your mortgage professional are grounds for revoking an approval because lenders are very strict on declaring any financial information.

5. Do NOT Apply For Other Loans, Credit Cards…

   Of course, that brand new Italian leather sofa set and espresso coffee table would look beautiful in your new living room– but it’s not worth the risk of having your mortgage approval revoked. By adding more debts, you increase your GDS ratio (gross debt service) which scares lenders because they automatically jump to the assumption that you are financially unstable, something that is grounds for revoking a mortgage approval.

 

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