Selling Real Estate to Family Members

Mortgagenomics Canada

A couple of weeks ago I talked about intergenerational wealth transfer and how reverse mortgages have propelled into the market place as a vehicle to access valuable equity with absolutely no monthly payment obligation. The homeowner (who must be at least 55 years of age) can apply to access up to 55% of their home equity and use the proceeds for anything they desire.

Another intergenerational transfer scenario came across my desk this past week, but this time it involved selling off a family home to another family member with the use of a mortgage. So nothing unusual here as far as the transaction is concerned - the purchase price was determined based on the fair market value and the qualifying mortgage was the means to close out the deal.

But the unique part of the transaction was that the down payment was gifted from the selling family member to the purchasing family member in the form of equity. So in other words, the purchasing family member essentially qualified for a 0% down mortgage!

For example, let's say Walter owns a property that can fetch $800,000 in todays market, but is willing to sell it to his son Wayne for $700,000. Wayne can qualify for a $700,000 mortgage, but he doesn't have the required minimum down payment. Here's where the critical family blood line comes in to play. Lenders will allow the selling family member to gift the down payment via the equity of the property (as long as both parties are direct family members). So, in this case, Walter would gift $100,000 to Wayne in the form of equity. Walter was good enough to gift as much as he did, but if he wanted to he could gift far less and instead choose to be paid out with higher mortgage proceeds. And there you have it, the down payment to secure the mortgage is accounted for and complete! Wayne scores the property with no down payment, and Walter feels good about chipping in for the down payment!

To formalize the transaction further, a statement must be included in the Purchase Contract that references that the seller is gifting the down payment from the equity. The lender will also require that their standard Gift Letter form is completed by both parties.

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