Down Payments from Debt for Banks

Upon understanding the way in which banks will accept gifts as a down-payment source, it doesn’t take much imagination to begin thinking up of clever ways to come up with some even more creative down-payment sources. While we certainly don’t want to encourage you to engage in any dishonest behaviour with your financial institution, we do believe in the educational benefits of sharing how it is that others have succeeded in procuring down-payments through non-conventional sources.

More often than not, these individuals will use lines of credit from out-side institutions to finance their down-payments, or implicitly have a repayment plan scheduled, even though the funds have been posted to the lending institution as a ‘gift’. So how is it that they get away from this when most institutions will explicitly forbid this kind of behaviour, therefore making its pursuit an act of fraud, it is important to understand that there is no harm in voluntarily repaying a gift over time.

When providing a cash gift for a down-payment, the person who provides the gift is providing explicit documentation stating that they will not be seeking reimbursement for the funds delivered (because they were a gift of course).

The banks will accept this sort of assurance, because they are more concerned about their ability to hold their client to a legal claim in the event of a default than they are their ability to maintain a stable relationship with their friends and family. This can be used to a borrower’s advantage, so long as they are actually in a position to service the full amount of the mortgage without fear of default.

Specifically, they can choose to service the gift as if it were a debt voluntarily, without compromising its nature as a gift. Simply put, they are gifting the funds back to the person that originally provided them. However, it is important to remember that the banks fund’s will need to take a priority in this sort of event, meaning that the person giving the funds must respect that there is always a likelihood that their relationship with the borrower may break down, resulting in an informal ‘default’ on the gift.

So with all of this in mind, how do we make this work? Frankly put, we probably shouldn’t even bother, because it places our friends and family in a situation where they are relying on our personal integrity to pay back an amount of funds to which they have already given up their claim. That being said, such a strategy is commonly pursued by members within a family, because of the way in which it keeps the funds within the family, and supports the net asset value of the family as a whole.