The Different Options your Family has when Helping you Buy a Home in Vancouver
In this day and age, especially in Vancouver’s popular real estate market, it’s not uncommon for home buyers to need help from their family in order to buy a home, whether for their first condo or help making the jump from condo to house. Mom Dad, Grandma and Grandpa are often in better positions financially (especially after downsizing to a smaller home) and can offer some financial help to their kids. There are many ways in which parents can help, but the one common theme is that it’s an agreement that has to be made between the family.
1. Guaranteeing the Loan
This option is popular with the self employed or those starting a new career. If you have enough for a down payment, but don’t make enough money to make mortgage lenders happy, this is the option for you. Mortgage lenders want to avoid people defaulting on their payments, so before offering any mortgage, they require that you show proof that you make enough income to pay mortgage payments, taxes, and bills. As a young individual, you may not have consistent income to prove this, however, if your parents “Guarantee the Loan” then your parents financial information is taken into consideration as well which should be enough to satisfy the mortgage lenders requirements. Your parents will also have to go on title as property owners (often with only 1% interest in the property) and your legal team may suggest they sign a trust declaration that they are on title only to satisfy mortgage lender requirements and that the property really belongs to you.
When you make enough money to satisfy mortgage lender’s requirements, you can re-mortgage and have your parents removed from title.
2. Helping with the Down Payment
For the young people making enough monthly income to satisfy mortgage lenders requirements, but don’t have the down payment necessary to secure a new home – your parents can provide some or all the funds necessary for the down payment. Your parents have to “gift” this money to you because if it’s loaned to you, the mortgage lenders see that as a loan and you may not be approved since you have outstanding loans. A simple gift letter needs to be drafted stating the funds are a gift from parent to child and there is no obligation on the child to repay the amount – whether or not you and your parents have an agreement for payback is up to you and will be done without the mortgage lenders knowing.
3. Helping to Pay for the Home
Parents are free to provide as much money as they wish towards their child’s down payment or property purchase price. One thing that should be kept in mind is the right to the property and it’s value in the future. For instance, the child’s spouse could claim 50% interest in the property even though they didn’t contribute any money to the purchase (if there’s a divorce involved, this becomes much more important). Parents can protect their “investment” in the property by registering a second mortgage against the property (their lawyer can do this before closing) thereby making the claim that the funds they provided are theirs, unless they have been returned.
4. Buying a Home for their Child
If your parents are in the position to full for the home in full – by all means, avoid mortgage fees and do this! Your parents can (and should) register a mortgage to protect their interest in the property. This mortgage can be payable on demand, with or without interest.
Every situation depends on the financial situation of every party and the agreement made between them. One thing is certain – speak with a financial advisor and your lawyer/notary to ensure the proper agreements can be drafted.