What you need to know about buying a home with family

By Jesse Abrams
October 03, 2021

Coming up with a down payment isn’t always easy, especially in this hot market, which is why more than 30 per cent of Canadian homebuyers seek help from a parent or family member. When buying a home, family members can lend a helping hand in the form of a “gift” or by participating as a co-signer. Both options are great ways to increase home affordability for first-time buyers and help them enter the market faster.

Receiving a ‘gift’ toward your down payment

A “gift” is money given by a parent or family member to help with a down payment. Regardless of the amount, gifted funds imply that the money is not a loan and the homebuyer is under no obligation to pay it back. When you receive a gift, a “gift letter” needs to be sent to your mortgage company to verify that these funds are in fact for your down payment. Lenders require this letter from buyers to rule out any further debt obligations and to ensure the source of funds before the mortgage can be approved.

A gift letter should include the following details:

  • The gifter’s name, address and phone number
  • The gifter’s relationship to the recipient
  • The dollar amount of the gift
  • The date the funds were transferred
  • A statement from the gifter indicating that they do not expect repayment
  • The gifter’s signature
  • The address of the new home purchase

 

As many Baby Boomers head into retirement, a great wealth transfer is taking place in Canada, giving many first-time buyers more opportunity to receive financial assistance from family members to buy a home. In fact, one-third of Baby Boomers in Canada’s four major cities have already given or plan to give living inheritances to their family members to purchase real estate. So, we anticipate seeing more first-timers buying with help from their families in the years to come.

Having a family member act as a co-signer

Help doesn’t necessarily have to come in the form of a cheque. A parent or family member can also act as a co-signer on your home. A co-signer is someone who applies for a mortgage with the primary borrower and legally agrees to take liability on the mortgage and pay off any debt if they are unable to make payments. In most cases, a co-signer is used when a homebuyer lacks the income or credit score to qualify for a mortgage. The benefit of a co-signer is that their credit score and income get combined with the buyer, which improves their home affordability and the overall chances of approval.

It’s important to note that a co-signer will be on the title of your home and fully responsible if you stop making your mortgage payments or cannot afford them. With that in mind, it’s highly recommended to review your financial circumstances in detail and determine a long-term budget before making any buying decisions. The last thing you want is to put any financial distress and obligations on your family members.

At Homewise, we receive many first-time buyer applicants who are getting help from family members to make a home purchase. As home prices rise and the market remains competitive, both options make it a little easier for first-timers to achieve their goal of homeownership. For more information, connect with an expert mortgage advisor to explore the various mortgage options.

About Jesse Abrams

Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto. thinkhomewise.com

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