Gift Of Equity On Home Purchase Mortgage Guidelines

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Gift Of Equity On Home Purchase Mortgage Guidelines

This BLOG On Gift Of Equity On Home Purchase Mortgage Guidelines Was UPDATED And PUBLISHED On September 3rd, 2018

Gift Of Equity On Home Purchase
The Gustan Cho Team at Gustan Cho Associates

What Does Gift Of Equity On Home Purchase Mean?

There are cases where a relative decides to sell their home to a relative.

The down payment from the seller is gifted to the home buyer relative.

  • Many times, an elderly parent may want to sell the family home to their son or daughter at a value much lower than the market or appraised value
  • In cases like these where the seller sells their property to a son, daughter, or relative below market value
  • A gift of equity on a home purchase can help the buyer from coming up with either the full or partial down payment or limiting on the home purchase
  • Lenders will require a structured gift of equity on home purchase letter signed with certain verbiage in the letter

In this article, we will cover and discuss Gift Of Equity On Home Purchase Mortgage Guidelines.

How Gift Of Equity On Home Purchase Works

How Gift Of Equity On Home Purchase Works

Normally, on a gift of equity on home purchase transactions, the seller sells the home to a buyer who is a relative at a reduced price.

  • The price below the market price or appraised value can be used as a gift of equity to the home buyer
  • The home buyer is limited on the down payment they need to put down
  • If there is enough gift to equity, then no down payment will be required by the home buyer
  • As mentioned earlier, the seller needs to complete a gift of equity letter with the proper verbiage prepared by the mortgage lender
  • The gift of equity letter/form states that the seller is offering a gift of equity to the borrower
  • The gift will under no circumstances be paid back
  • The seller may also offer to pay the home buyer’s closing costs
  • If there is enough equity on the gift of equity on a home purchase, the buyer does not have to come up with any money

Buyer needs to qualify for a residential mortgage loan.

FHA Versus Conventional Guidelines On Gift Of Equity

What are FHA Versus Conventional Guidelines On Gift Of Equity

HUD Gift of Equity Guidelines states that if you have not lived in the property you are buying under a gift of equity for the past 12 months, the seller needs to gift you 15% equity. If you have live in the property for the past six months and are currently living in the property, the seller can gift you 3.5% down payment. With conventional loans, any amount can be gifted whether you live in the property prior to buying it by a relative.

Tax Consequences With Gift Of Equity On Home Purchase

Tax Consequences With Gift Of Equity On Home Purchase

Home Buyers and Sellers participating in the gift of equity home purchase transactions can have potential tax consequences.

  • Both buyers and sellers should consult with their accountants or tax advisors concerning on how the gift of equity transactions can affect their tax liabilities

Consult With Tax Advisor

Consult With Tax Advisor

Be aware that there are potential tax consequences for gifts of equity.

  • Home Buyers and Sellers should discuss the particulars with a tax advisor or qualified accountant to understand how it can impact them specifically
  • Depending on tax bracket or on the number of dependents and marital status, there might be ways to avoid in paying a substantial gift tax or taxable gift tax may be avoidable without having to pay gift taxes

Allowable Gifts

Allowable Gifts

There are allowable gifts from family members.

  • For example, a person is permitted to give a gift to another person of $12,000 annually without disclosing it to the Internal Revenue Service
  • There is a $1,000,000 gift limit to a person over the life of those receiving the gift
  • Buyers receiving a gift from both parents, each parent can gift a child $12,000 each for a total of $24,000 to that particular child
  • Anything gift over that limit can be rolled into the following year until the child has received a maximum of $1,000,000 over the course of his or her life

Gift Of Equity On Home Purchase For FHA Insured Mortgage Loans And Conventional Loans

Gift Of Equity On Home Purchase For FHA Insured Mortgage Loans And Conventional Loans

The U.S. Department Of Housing And Urban Development (HUD) which is the parent of The Federal Housing Administration (FHA) allows 100% gift of equity from the donor to a relative.

  • However, on conventional mortgage loan programs, the mortgage lender wants to see that the person receiving the gift to have 5% of their own funds for the down payment of the gift of equity home purchase

Please contact Gustan Cho Associates Mortgage Group for more information on structuring a gift of equity mortgage loan at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

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