Gift Of Equity On Home Purchase

What Does Gift Of Equity On Home Purchase Mean?

There are cases where a relative decides to sell their home to a 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.  On cases like these where the seller sells their property to a son, daughter, or relative below market value, a gift of equity on home purchase can help the buyer from coming up with the down payment or limiting the down payment required to close on the home purchase.  The mortgage lender will require a structured gift of equity on home purchase letter signed with certain verbiage in the letter.

How Gift Of Equity On Home Purchase Works

Normally, on gift of equity on home purchase transaction, 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 so the home buyer is limited on the down payment they need to put down or 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 which states that the seller is offering a gift of equity to the borrower and that 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 gift of equity on home purchase, the buyer may not have to come up with any money but does need to qualify for a residential mortgage loan.

Tax Consequences With Gift Of Equity On Home Purchase

For those buyers and sellers participating on gift of equity home purchase transactions, there may be potential tax consequences.  Both buyers and sellers should consult with their accountants or tax advisors concerning on how gift of equity transactions can affect their tax liabilities.

Consult With Tax Advisor

Be aware that there are potential tax consequences for gifts of equity.  You should discuss the particulars with a tax advisor or qualified accountant to understand how it can impact you specifically.  Depending on your tax bracket or on the number of dependents and your 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

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.    If you are 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

The Federal Housing Administration 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.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

Comments are closed.