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Can You Give Someone the Down Payment to Buy Your House?

give someone money

This question presents itself in many different ways:

  • I’m selling my house on ComFree and I have someone interested, but they don’t have enough for the down payment.
  • Can I give them part of the down payment to help them out?
  • I REALLY need to sell my house! Will the bank really care where the down payment comes from, if I’m just willing to give it to them?

There are 3 reasons why the bank cares about where the down payment comes from:

  1. it’s the law, they have to. It is their responsibility to do what they can to help prevent money laundering. Acceptable forms of down payment are: -from own resources, savings, etc, – -borrowed -through an insured program called the FlexDown, -gifted from an immediate family member. – In order 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.
  2. the lender cares about where the down payment comes from because it is an indication that the buyer is financially qualified to purchase the home. Obviously a down payment from own resources is best, as it shows that the buyer has positive cash flow, and 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 down payment 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 down the thought process… the more skin you have in the game, the less likely you are to stop making your payments and walk away.
  3. Most important, the down payment 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, 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 of their own money.

How does the source of the down payment impact the LTV?

In order to answer this, we have to look at how a property’s value is established.

To put it simply, 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 going back to the scenarios above, if you are selling your house on ComFree for $400k and you give $20k down payment to the buyer, so that she has enough to buy your place and get the mortgage, the actual sale price (the amount you agreed to sell for, and the amount the buyer pays) is $380k not $400k.

The buyer has to have some skin the game, in order for the banks to feel comfortable enough to lend them the money. That is why in Canada the minimum down payment required is 5% of the purchase price of the property, or put another way, the maximum LTV is 95% of the value of the home.

If the buyer isn’t coming up with the money for the down payment 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 down payment to the buyer so they have a bigger down payment 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 down payment, 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 a version of mortgage 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.

“Is there any other way that I can help someone who is short on down payment?!”

As mentioned, there are 3 acceptable sources for a down payment, 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 down payment is coming by way of a gift. You would then complete a gift letter indicating that the down payment is a true gift and has no schedule for repayment.

If you are selling your house to someone you are not directly related to, you are not able to give them the money for your down payment.

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 down payment.

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!