Down Payment Sources: Gifts and HELOCs

Coming up with a down-payment for a new home is sometimes the hardest part of acquiring a mortgage. No matter how perfect your credit score is, how good your income is, and how strong your relationship with your bank it, without a down payment, you’re out of luck.

That being said, not many borrowers realize just how flexible the rules around a down-payment can sometimes be, so long as they are able to understand the implications of pursuing the alternatives. Besides from straight cash injections from a savings account, a borrower can strategically work around a couple of options to help finance their big move.

One of the easiest ways to pursue a down-payment is through a one-time gift. This strategy involves having a cooperating party provide you with a lump-sum amount of cash that you will be using for a down-payment, as well as a letter certifying that the funds come with no obligation to repay them. While this might sound a little bit awkward, think of it as providing the same kind of benefit as a co-signature, but in a way that allows an individual with bad credit to contribute.

For example, if your spouse happened to have particularly bad credit, it would not be very advantageous to have them on the loan as a co-signer. However, if they provided a cash gift to support the down-payment, they would be able to contribute to the loan through their own means.

Alternatively, parents are often more than happy to provide a cash gift to support their children in purchasing a new home. Lastly, there exist a number of opportunities where land-lords will reimburse their renters with a portion of their rental cheques as a gift, to help their renter to purchase the unit out from the land-lord after a given period of time.

A second down-payment source that not many borrowers think of when they are moving to a new home lies in the equity of their existing property. While granted, this option is not available to first time borrowers, it is an extremely valuable strategy for upgrading to a larger location, or to begin investing in secondary properties. By using funds from a HELOC, a borrower is able to leverage all of the equity they have built up in their property to establish a hold on their new dream home.

The benefits of this might range from simply securing the rights to accessing the mortgage funds, or to actually reduce the amount of the mortgage payments on the newer property to the point at which they are comparable to the previous arrangement. Best of all, these funds are then recouped in the event that the previous home should be sold, meaning that the borrower has seamlessly transferred their obligation to the new asset, possible without even needing to provide new funds out of pocket for the purchase.