Blog Post

Can I Give Someone The Downpayment to Buy My House?

Katherine Martin • Jun 04, 2019

Although it might not always be this straightforward, the question “Can I give someone the downpayment to buy my house?” presents itself in many different ways. And the answer to all of them is no, well… except in one circumstance, but we will get to that later. Here are a few scenarios played out.

“I am selling my house on ComFree and I have someone who is interested in purchasing my property, but they don’t quite have the full downpayment, can I give them part of the downpayment to help them out? I REALLY need to sell my house! Does the bank really care where the downpayment comes from?”

Let’s establish why the lender cares about where the downpayment comes from, there are 3 reasons.

Firstly by law, they have to. In order to prevent money laundering, lenders have to prove the source of the downpayment on the purchase of a home. Acceptable forms of downpayment are from own resources, borrowed (through an insured program called the FlexDown), or gifted from an immediate family member. To prove the funds are own resources, 90 days bank statements are required indicating the money has been in the account for 90 days or to show an accumulation of funds through payroll deposits.

Secondly, the lender cares about the source of the downpayment because it indicates the buyer is financially qualified to purchase the home. Obviously a downpayment from own resources is best, as it shows that the buyer has positive cash flow, is able to save money and manages their finances in a way that they will most likely make their mortgage payments on time. The bigger the downpayment the better (as far as the lender is concerned) because there is a direct correlation between how much money someone has as equity in a property to the likelihood they will/won’t default on their mortgage. To break that down… the more skin you have in the game, the less likely you are to walk away.

Thirdly and most important to this scenario, the downpayment establishes the loan to value ratio. Now, the loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value, or said in another way they can’t lend higher than a 95% LTV. This means that if someone is buying a home for $400k, the lender can lend $380k, and the buyer is responsible to come up with 5% or $20k in this situation.

So how does the source of the downpayment impact LTV?

Great question, and to answer this, we have to look at how a property’s value is established. Although we could go into a lot more detail here, very simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course within reason, having no external factors coming into play and when you are dealing with real estate, it’s usually compared to what people have agreed to in the past on similar properties.

So combining our scenarios, if you are selling your house for $400k and you give the $20k downpayment to the buyer, the actual sale price (the amount you agreed to sell for, and the amount the buyer pays) is actually $380k not $400k. So to take the purchase contract in to the lender and request a mortgage for $380k would actually be a 100% LTV and financing will be declined because the minimum LTV in Canada is 95%.

Now, despite how people attempt to rationalize or manoeuvre wording and money, its all smoke and mirrors, if the buyer isn’t coming up with the money for the downpayment independent of the seller, it impacts the LTV and financing will not be completed. Here are variations of this scenario played out in different ways.

“Can I increase the sale price of the property I’m selling and “gift” the downpayment to the buyer so they have a bigger downpayment and it looks more favourable to the lender?”

Nope, again, this is a trick to try and manipulate the LTV.

“If the buyer wants my house really badly, but doesn’t have the full downpayment, can they borrow the money from somewhere and then we provide them with a cashback at closing to repay the debt?”

No. ANY cash back from the seller to the buyer when the purchase transaction closes is a no go. Just like on the front end of the purchase, any money refunded or given back on closing impacts the LTV and it would impact the mortgage lenders decision to lend.

“But what if the lender doesn’t know about it?”

This is called fraud. Having conditions to the sale of a property that are not disclosed to the lender is fraud. There is no 2 ways about it.

“You mentioned at the start of this article that there is one way to give someone the downpayment to buy a house, tell me more!”

As mentioned, there are 3 acceptable sources for a downpayment, one of them being a gift from an immediate family member. So if you are selling your property to an immediate family member, you are able to gift the equity to them on the purchase contract. You would write that condition on the actual purchase contract, that the downpayment is coming by way of a gift. You would then complete a gift letter indicating that the downpayment is a true gift and has no schedule for repayment.

So there you have it. If you are selling a house to someone you are not directly related to, you are not able to give them the money for your downpayment. Alternatively, if you are buying a house from someone you are not directly related to, you are not able to take money from them for the downpayment. If anyone tells you otherwise, they are misinformed. And if anyone ever presents a way to “get around the rules” regardless of how simple it sounds, it’s probably fraud.

If you have any questions about this or anything else mortgage related, I would love to talk with you!

Contact me anytime!

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Katherine Martin

Origin Mortgages

Phone: 1-604-454-0843
Email: kmartin@planmymortgage.ca
Fax: 1-604-454-0842

Why Downpayment Source Matters

By Katherine Martin • 01 May, 2024

If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value. Anti-money laundering Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase. Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member. To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means. Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account. Financial suitability Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property. Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely. The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk. Downpayment establishes the loan to value (LTV) Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation. But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past. You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV. All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud. So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.

Porting Your Mortgage

By Katherine Martin • 24 Apr, 2024

Porting your mortgage is when you transfer the remainder of your current mortgage term, outstanding principal balance, and interest rate to a new property if you’re selling your existing home and buying a new one. Now, despite what some big banks would lead you to believe, porting your mortgage is not an easy process. It’s not a magic process that guarantees you will qualify to purchase a new property using the mortgage you had on a previous property. In addition to re-qualifying for the mortgage you already have, the lender will also assess the property you’re looking to purchase. Many moving parts come into play. You’re more likely to have significant setbacks throughout the process than you are to execute a flawless port. Here are some of the reasons: You may not qualify for the mortgage Let’s say you’re moving to a new city to take a new job. If you’re relying on porting your mortgage to buy a new property, you’ll have to substantiate your new income. If you’re on probation or changed professions, there’s a chance the lender will decline your application. Porting a mortgage is a lot like qualifying for a new mortgage, just with more conditions. The property you are buying has to be approved So let’s say that your income isn’t an issue and that you qualify for the mortgage. The subject property you want to purchase has to be approved as well. Just because the lender accepted your last property as collateral for the mortgage doesn’t mean the lender will accept the new property. The lender will require an appraisal and scrutinize the condition of the property you’re looking to buy. Property values are rarely the same Chances are, if you’re selling a property and buying a new one, there’ll be some price difference. When looking to port a mortgage, if the new property’s value is higher than your previous property, requiring a higher mortgage amount, you’ll most likely have to take a blended rate on the new money, which could increase your payment. If the property value is considerably less, you might incur a penalty to reduce the total mortgage amount. You still need a downpayment Porting a mortgage isn’t just a simple case of swapping one property for another while keeping the same mortgage. You’re still required to come up with a downpayment on the new property. You’ll most likely have to pay a penalty Most lenders will charge the total discharge penalty when you sell your property and take it from the sale proceeds. The penalty is then refunded when you execute the port and purchase the new property. So if you are relying on the proceeds of sale to come up with your downpayment, you might have to make other arrangements. Timelines rarely work out When assessing the housing market, It’s usually a buyer’s market or a seller’s market, not both at the same time. So although you may be able to sell your property overnight, you might not be able to find a suitable property to buy. Alternatively, you may be able to find many suitable properties to purchase while your house sits on the market with no showings. And, chances are, when you end up selling your property and find a new property to buy, the closing dates rarely match up perfectly. Different lenders have different port periods Understanding that different lenders have different port periods is where the fine print in the mortgage documents comes into play. Did you know that depending on the lender, the time you have to port your mortgage can range from one day to six months? So if it’s one day, your lawyer will have to close both the sale of your property and the purchase of your new property on the same day, or the port won’t work. Or, with a more extended port period, you run the risk of selling your house with the intention of porting the mortgage, only to not be able to find a suitable property to buy. So while the idea of porting your mortgage can seem like a good idea, and it might even make sense if you have a low rate that you want to carry over to a property of similar value, it’s always a good idea to get professional mortgage advice and look at all your options. While porting your mortgage is a nice feature to have because it provides you with options, please understand that it is not a guarantee that you’ll be able to swap out properties and keep making the same payments. There’s a lot to know. If you’re looking to sell your existing property and buy a new one, please connect anytime. It would be a pleasure to walk you through the process and help you consider all your options, including a port if that makes the most sense!