How Parents Can Help Their First-time Home Buyer Children Get Into The Market
Tuesday Jul 19th, 2022
With rising interest rates and the increasing cost of living it can be difficult for a first-time home buyer to get into the real estate market. Fortunately, if parents have the financial means, there are some ways they can help their children purchase their first home. Our mortgage expert Sheri Creese, Mortgage Broker and President of Mortgage Brokers Ottawa, shares some ways parents can assist as well as some important considerations to keep in mind.
Gift of a Down Payment
A portion, or the entire down payment amount, can be gifted to help with the cost. This can be a financial gift from any immediate family member (parents, grandparents, brothers, sisters, aunts, and uncles) and can be up to the full amount of the down payment. It is important to note though that this arrangement must be approved as a gifted down payment with the lender. While the full amount is not always needed, the homebuyer(s) must prove to the lender that they have 1.5% of the total purchase cost, in addition to the down payment, from their own non-gifted resources to cover the closing costs. The same minimum down payment rules apply to gifted down payment amounts where at least a 5% down payment is required for the first $500,000, at least a 10% down payment is required for any amount over $500,000. For down payments of less than 20%, the maximum purchase price is $1,000,000.
Being a Co-signer or Guarantor
When a homebuyer doesn’t qualify for a mortgage because their income isn’t high enough, a co-signer/guarantor can be added to the mortgage. The co-signer/guarantor is then required to pay the mortgage if the homebuyer is unable to make the payments. In the case of a parent helping a child, the parent’s income is used in addition to the child’s income for the purposes of qualifying for the mortgage. There are some important items to keep in mind though before going this route. The co-signer/guarantor must have an income stream to add value to the application, meaning that parents who are retired with limited income but significant assets may not add value to the application. In addition to their income, all the co-signer/guarantor's liabilities must also be taken into consideration on the application. This includes the carrying costs (mortgage, property taxes, heat) of any real estate they may own such as a principal residence of their own and/or a cottage.
Being a Cosigner
There are some key differences between a co-signer and guarantor you’ll also want to understand. A co-signer is on the title to the property, meaning the parent would be an owner of the property along with their child. This provides the co-signer or parent with the benefit of the security of the asset, but they do also bear the liability of the payments. There are also potential capital gain implications in this scenario. Parents may need to claim a capital gain of any appreciation in the home value when the homebuyer sells the home. In the future should the child want to remove the co-signer from the title, they would need to completely qualify for the mortgage on their own and would need to also have a lawyer process the change of the deed.
Being a Guarantor
A guarantor on the other hand is not on the title to the property. This means they have no claim to the asset but are equally as liable for the mortgage as the home buyer. As the parent is not on the title to the property, they won’t be subject to potential capital gains. If in the future the homebuyer or guarantor would like to be removed from the mortgage, the homebuyer would need to again qualify on their own for the mortgage and the mortgage company would then make the needed change. A lawyer would not be involved as no change to the title would be necessary.
For first-time home buyers, some financial support from parents or family members who are able to do so can be incredibly helpful. Are you looking to learn more about first-time home buyer mortgage options, or do you have additional questions about being a co-signer or guarantor? Get in touch with our expert!
Mortgage Broker & President
Mortgage Brokers Ottawa
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