Gift Of Equity Mortgage Guidelines When Buying Home At Discount

Gift Of Equity Mortgage Guidelines When Buying Home At Discount

We Have No Lender Overlays On Gift Of Equity Mortgage Guidelines When Buying Home At Discount. We can help you qualify for purchase when buying a home at a discount from a family member a gift of equity. Apply NOW with Gustan Cho Associates and leave it to us.

In today’s ever-so-changing mortgage market, we are seeing more and more cases where gifts of equity come into play.

What is a gift of equity?

It is a very complicated topic and there are specific guidelines on this process. In short, a gift of equity is a gift provided by the seller to the buyer in the form of the properties existing equity. This is usually a transaction with a family member. In this blog, we will go over how to buy a home from a family member with no or little down payment.

Gift Of Equity Mortgage Guidelines: Parent Gifting Equity To Children By Selling Home At Discount

When a parent uses the equity in their home as the form of the down payment for the buyer. Typically, that would be one of their children. In theory, they are giving up their profits from the sale of the property and gifting it to the buyer. we will dive into this topic in more detail. Since a parent selling the house to their children is the most common use of a gift of equity, let’s go over an example now.  

Gift Of Equity 2018
Gift Of Equity 2018 Mortgage Market
Bob has been renting his parents’ house for 3 years. in this example Bob has been paying $1,500 a month and has never missed a payment. Bob’s parents decide to sell the home to Bob instead of putting the home on the market. The value of the home is currently $300,000. The parents need to net $250,000 from the sale and are willing to give a gift of equity of $50,000. That $50,000 will be used as the “down payment” for Bob. In that example we skipped over a key aspect of the transaction, CLOSING COSTS.

How do closing costs factor into a gift of equity?  

When using a gift of equity, you may also incorporate seller concessions. Seller concessions allow for 3% of the purchase price with conventional financing and up to 6% of the purchase price with FHA or VA financing. To piggyback off of the example above, Bob’s parents could choose to give him $45,000 as a gift of equity and add $5,000 of seller concessions to the sales contract. This will now give Bob $5,000 to use for loan costs, creating a low out-of-pocket money transaction. In some cases, you can gift the home and the buyer may not need to bring any money to the closing. In theory, he is now able to finance the costs into the loan.  

How Does Gift Of Equity Loan Work?

The gift of equity loan does not work. Under gift of equity mortgage guidelines, a gift of equity cannot be a loan and can only be a gift.

  • A gift letter for mortgage lender will be required
  • The gift letter will be provided by the lender by their own gift of equity letter format

Gift of equity mortgage guidelines is specific that for the gift of equity mortgage to work, sellers will need to have equity in the home they are selling at a discount.

Equity Is Determined By Home Appraisal

An appraisal will be completed as part of the loan process.

  • For the example above to work, the house must appraise for at least $300,000
  • If the home appraisal comes in low, the gift of equity needs to be lowered or removed
  • Just know the equity must be real to give as a gift
  • Assuming the equity is in the property, the process is very similar to a regular mortgage loan
  • There will still be required documentation such as proof of rental payments, income documentation, proof of assets, etc. 
  • Any and all documentation for a regular mortgage loan will be needed
  • If you are currently renting the house from a family member, proof of rental payments will be necessary to build a housing tradeline

Showing on-time rental payments is one way to strengthen borrower’s loan applications.

Acceptable Eligible Donors

One of the most confusing aspects of the gift of equity process is determining who is an acceptable donor?

  • You must be related to giving a gift of equity
  • Now in today’s modern world, a relative can mean many things
  • The definition in relation to a gift of equity is defined as “the borrower spouse, child, or another dependent, or by any other individual who is related by blood, adoption, barrage, or legal guardianship semicolon or a fiancé, or domestic partner.” 
  • Hopefully, that clears up any confusion

Gift Of Equity Mortgage Guidelines on who is classified as a relative is set in stone.

Gift Of Equity Mortgage Guidelines For Buyers And Sellers

The gift of equity process can work in favor of both the seller and the buyer. The buyer comes out ahead on the deal as they do not need to put down a down payment. And the seller gets the satisfaction of helping a relative. The seller is able to give the American dream to one of their relatives. 

If a gift of equity is something that you think may suit you, please give us a call directly. Borrowers can call me on 630-659-7644 or send me an email at mgracz@gustancho.com. We specialize in conventional, FHA, VA, and USDA financing without any LENDER OVERLAYS. If the gift of the equity process is something not for you, I encourage you to check out our other blogs on related topics. Since we do not have any lender overlays many of our Barbers utilize gift funds to purchase their new home. We are always here to help with any mortgage-related questions, seven days a week! 

4 Comments
  1. Cindy says

    Hi

    When using the equity gift does my mortgage need to be paid off in full in order to sell rental property to family member that already lives in property?

    Thank you

    Cindy

    1. Gustan Cho, NMLS 873293 says

      You get a gift of equity when buying a home from a family member so you can live in the property as an owner occupant primary home. If you are gifting the equity in a home for a family member to purchase it, then that family member needs to live you are gifting the home to. I do not understand what you mean that a mortgage needs to be in full? The person who you are gifting the property to will get a new mortgage and be paying off your existing mortgage. Is that what you mean?

    2. Gustan Cho, NMLS 873293 says

      Good evening Cindy. When you are gifting equity on a home to your son, daughter, or another family member, the family member buying your house will be paying off the mortgage and take possession of the home your gifting the equity. Your mortgage will be paid off by the family member they are buying your house.

  2. Helen Jones

    
    You will qualify for non-qm loans with us but unfortunately we are not licensed in New York. I will refer you to my Associate Eric Jeanette who may have someone in New York. What is your number?

    On Fri, Nov 27, 2020, 1:13 AM whealy222 wrote:
    Hello. I found your name on a forum. You seem to have a good grasp on the current guidelines.

    I am curious to find out if I can qualify for a loan. I declared a bk chapter 7 in September last year. The discharge date was 12/24/19 I was self employed and I was forced into bankruptcy due to outside factors that were out of my control. I ran an online business and due to my ability to market my website being taken away I lost all my income.

    I am now a w2 employee. I have been with the company for over a year. My currently paystub is over 100k w2 so far, salary 75k and the other is commission with a 2k a month minimum. My DTI would be low. I don’t have any debt anymore. No car payments or credit card. Just my house loan which I was never late on. I would want to sell my house and use bulk of the proceeds for down payment.

    I also own my current home with has roughly 70k in equity.

    I am curious would I qualify ? Currently scores mid 600’s. Definitely the middle score will be over 640.

    I live in new York. Upstate ny. Would I qualify and if so, what type of down payment?

    Would I qualify under fha extenuating circumstances?

    Thanks

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