Borrowed and Gifted Down Payments: What You Need to Know
Saving for a down payment is one of the biggest hurdles to buying a home. While many buyers use personal savings, there are other options. Two of the most common are borrowed down payments and gifted down payments. Both can help you get into a home sooner, but the rules and requirements are different.
Borrowed Down Payments
A borrowed down payment is when the funds come from a loan, line of credit, or other borrowing source instead of personal savings.
How It Works
Lenders will consider borrowed down payments as long as you still qualify under standard debt service ratios. This means the payment on the borrowed funds must be factored into your total debts when calculating mortgage approval.
For example, if you borrow $25,000 from a line of credit for your down payment, the monthly payment on that line of credit will count toward your total debt load, just like a car loan or credit card.
Insurance Premiums
If your down payment is borrowed, the default insurance premium is higher. Normally, 5% down has a 4.00% premium, but with a borrowed down payment the premium is 4.50%. That difference can add thousands over the life of the mortgage, but for many buyers it is the only way to get into the market sooner.
Who Allows It
Most lenders allow borrowed down payment options, but your debt ratios must still be in line. In addition, lenders often expect slightly higher standards for credit when using borrowed funds compared to using traditional savings. Local credit unions may also have their own borrowed down payment programs, but availability can vary.
[Click here to see if you qualify for a borrowed down payment mortgage]
Gifted Down Payments
A gifted down payment is money given to you by an immediate family member for the purpose of buying a home.
How It Works
Gifted down payments are straightforward. The funds must come from parents, grandparents, or siblings, and lenders require a signed gift letter confirming that the money is not expected to be repaid. You may also be required to show proof the money has been gifted by providing bank statements showing the deposit into your account.
Minimum Down Payment Rules
Whether your down payment is borrowed, gifted, or saved, the minimum down payment rules in Canada still apply:
For example, a $600,000 purchase requires $35,000 down. That could be all savings, all gifted, all borrowed (if your lender allows it), or a combination.
Things to Keep in Mind
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Paper trail matters. Lenders must see where the down payment came from. Be ready to provide bank statements or a gift letter.
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Insurance rules. Borrowed down payments will add 0.50% to the default insurance premium.
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Qualifying ratios. With borrowed down payments, the new debt payment is added to your debt ratios. This could lower the maximum purchase price you qualify for.
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Closing costs. Lenders will want to see that you have funds available for closing costs.