Ready to buy your first home so you can take advantage of favorable rates, but aren’t quite sure you have enough cash upfront to cover your down payment? Don’t stress, you have options. If you’re lucky enough to have a loved one help you out with part of your down payment, you’ll need to make sure you have what’s known as a “gift letter.” Learn more about what this letter means to lenders, how to create one that matches industry standard requirements and what you’ll need to know if you plan to accept money from a donor to help cover your down payment costs.

Why Do I Need A Gift Letter?

A mortgage gift letter shows lenders that you’re under no obligation to return the money that was gifted to you by a donor to cover your down payment. It gives them assurance that if they approve you for a home loan, they won’t have to worry about the extra financial stress you may face trying to make payments on time while also attempting to pay back a large sum of money that was given to you by a loved one. Mortgage lenders want to ensure that your home loan payment responsibilities are kept to the mortgage itself and not other third parties who may have stepped up to help make your home buying dream a reality.

Gift Letter Requirements

There are a few requirements you’ll need to meet if you want to ensure your gift letter is valid:

  • Name of the mortgage borrower
  • Your donor’s name, address and phone number
  • The donor’s relationship to the borrower
  • The amount of money being gifted
  • A statement that the gift is not to be paid back
  • New property’s address

When it comes to conventional mortgage loans, typically a donor must be an immediate family member. Anyone in a special relationship with the home buyer (godparents, close family friends etc.), must provide evidence of the relationship and there’s no guarantee that the lender will accept the letter.

There are also rules that apply based on your employment status. If you’re self-employed, you’ll need to cover 5% of the purchase price on your own and the remaining 15% can be gifted by a donor. If you’re employed full-time, the entire amount of the down payment can be gifted with no issue.

Keep in mind that regardless of your personal situation, your lender may require proof that the money has been transferred into your bank account once they see your letter. It doesn’t matter if the money was gifted from a savings account, line of credit or even a credit card. Since the donor is a close relative, their accounts aren’t normally required to be disclosed.

Gifted Money And Taxes

In Canada, there is no “gift tax” so this means that your donor can gift you as much as they like without incurring any taxes.

Gift Letter Format And Template

You’ll want to make sure your gift letter follows a specific format and that all the required elements are included so you don’t have to waste time going back and forth with your lender and your donor to get the details ironed out properly. The more prepared you are in advance, the easier the process will be for your donor and the happier your lender will be to see a properly compiled document that checks off all the boxes.

The purpose of the gift letter template is to clearly identify that the money for the down payment is a gift and that the donor does not need to be repaid. A 90-day history of bank account activity is usually required by the lender. Further account information may be required, as well as a fresh gift letter if one was written 90+ days ago. It’s also important to mention that most lenders will require the gifted money to be in the buyer’s account at least 2 weeks prior to the closing date so be sure to keep this timeline in mind as you plan.

[Date]

To whom it may concern,

I, John Doe, hereby certify that I gave a gift of $5,000 to Jane Doe, my sister, on Jan. 1, 2023 to be applied toward the purchase of the property at 123 Main Street.

I certify that this payment is a gift and that there is no obligation, either expressed or implied, of repayment. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker.

I have given the gift from the account listed below, and have attached documentation to confirm that the money was received by the applicant prior to settlement.

The source of this gift is:

[Type of account]

[Name of financial institution]

Sincerely,
John Doe
[Signature]
321 Avenue Street
Anytown, ON
(123) – 456 – 7890

Regardless of whom is gifting you money for a down payment and how much they’ll be gifting, it’s important to remember that lenders will still want to see proof of steady income and a solid credit score in order to consider you for a mortgage loan.