The Bank of Mom and Dad: Gifts & Loans

Homeownership is becoming increasingly difficult as real estate prices climb and mortgage rules change. The Bank of Mom and Dad has become a saving grace for many children hoping to buy a home in this housing landscape. Family members can help by gifting or loaning money for a down payment.

While financial help from family can make homeownership possible, there are important considerations to keep in mind. Here’s how family support works in the mortgage process and what both parents and homebuyers should know before moving forward.

How parents can help with a mortgage.

Parents or immediate family members (grandparents, parents, siblings etc) can provide financial assistance in several ways:

1. Gifted down payments

A gift is the most common way parents help their children buy a home. A gifted down payment means that the money does not need to be repaid. 

Lender requirements for gifted funds:

• A signed gift letter stating that the money is a gift and not a loan.
• Proof that the funds have been transferred into the buyer’s account.
• Typically, gifts must come from immediate family members (though some lenders allow extended family and we can discuss this and see what’s available in your case).

Since a gift does not create additional debt, it does not impact the borrower’s mortgage qualification—making it an attractive option for both buyers and lenders.

2. Parental loans

Instead of gifting money, some parents choose to loan their children funds for a down payment. This is common when parents want to help but also expect to be repaid over time.

Considerations for a parental loan:

• Lenders will treat this as debt, meaning it could reduce the amount the child qualifies for.
• A formal loan agreement outlining repayment terms can help avoid misunderstandings.
• Parents should consider the impact on their own financial situation, especially if they are nearing retirement.
• Speaking to a lawyer to have a signed agreement will be best in this case.

The considerations of family financial help.

Advantages.

Let’s go through both the pros and cons of helping your child out with a gift or a loan during the mortgage process. 

• Easier mortgage qualification – A larger down payment may reduce mortgage costs and lower monthly payments.
• Better mortgage terms – A bigger down payment can result in better interest rates.
• Faster entry into the market – Financial help can allow buyers to purchase sooner instead of waiting to save up.

Disadvantages. 

• Family tensions – Mixing money and family can lead to disagreements, especially if the agreements aren’t clear.
• Potential tax implications – If a loan is interest-free or forgiven, it may have tax consequences.
• Impact on parents’ finances – Parents should ensure they don’t jeopardize their retirement savings to help someone else.

Let Mortgage Okanagan guide you.

If you’re considering gifting or loaning money to a family member, here are the key takeaways to consider:

• Gifts are the best option for mortgage approval since they don’t add debt.
• Loans must be disclosed and may affect mortgage qualification.
• It’s important to have clear agreements to avoid misunderstandings.
• Parents should consider their financial future before offering help.

You can also consider co-signing for the mortgage, which I’ve written extensively about on my website. This is a third option if your loved one doesn’t qualify by themselves.

If you’re thinking about becoming the Bank of Mom and Dad, or using the Bank of Mom and Dad, it’s important to plan carefully. Speaking with a mortgage broker, like myself, can help you navigate the process and ensure a smooth transaction for everyone involved. We will go over your situation and decide which is the best option for an approval.Give me a call at 250-826-3111, apply on my website or contact me through my online contact form to start the process today.