When do I need a gift letter for a mortgage?

When purchasing a home, as we have discussed many times, you need at least 5% down on a $500,000 home, and 10% on the remainder. The bank insists that you have this minimum down payment before they will consider financing the remainder of the purchase price.

The source of this down payment varies from client to client. For example, some clients will use the proceeds from the refinance of another home towards the down payment on the purchase of the new home. [Note: the minimum down payment on a rental/investment property is actually 20%.] other times, the client will save up the down payment or use their RRSPs towards the down payment in the case of first time homebuyers. However, there is another source of the down payment that the lender will except and that is a gift from an immediate family member.

When you receive a gift from a family member that will be used towards the down payment on the purchase of a home, the lender will require a gift letter. Each lender has their own template for the gift letter but they all pretty much say the same thing. They outline who the gift is, the relationship to the borrower, the amount that is being gifted, and a statement that certifies that there is no intention that this gift will be repaid. In other words, the gift letter certifies that the gift is not a loan. Why is this important? Because the bank is qualifying you based on, among other things, your debt load vs your income. and of course, if this gift is actually a debt, then this must be factored in to the debt load or the debt ratios as it is known in the mortgage industry.

For most banks, they will only require this letter. However, many banks will also call the giftor to confirm, check the recipient’s bank statements to verify the money arriving and some will even ask to see the giftor’s account statement to show the money leaving! If you have received said gift more than three months prior then the bank usually doesn’t ask to see the evidence.