Gift of Equity on Home Purchase Mortgage Guidelines

In this blog, we will cover and discuss the gift of equity on home purchase mortgage guidelines. Many people want to keep the family home in the family. When the parents retire and downsize, mom and dad want to sell the home to one of their children at a discount. What does the gift of equity on home purchase mean? Alex Carlucci of Gustan Cho Associates explains what gift of equity on home purchase means:

Gift of equity on home purchase is when a home seller sells their home to a homebuyer who they are very close with. Usually a family member or very close friend of the seller. Gift of equity on home purchase means when the home seller will sell the home at a discount. What this means is the seller, sells the home below the market or appraised value of the home. By selling the home under market value, the home buyer will gain instant equity in the home purchase.

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’s relative. Therefore, instead of giving the homebuyer cash for a gift, the seller gifts the equity in their home to the home buyer. In the following paragraphs, we will cover gift of equity on home purchase.

Common Gift of Equity on Home Purchase Case Scenarios

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. Dale Elenteny of Gustan Cho Associates explains who can give a gift of equity on home purchase:

Home sellers who can give a gift of equity on home purchase are eligible to offer a gift of equity on home purchase to a family member, including legal siblings, parents, grandparents, legal guardians, and/or their spouses.

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.

How Gift of Equity on Home Purchase Works

Normally, on a gift of equity on 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.

The loan officer will instruct the seller and buyer on how to structure the gift of equity real estate purchase contract and will structure the home purchase and mortgage process accordingly.

The gift of equity on home purchase is not difficult. It is similar to a regular home purchase process. The loan officer of the mortgage company will coordinate the gift of equity on home purchase with the seller, borrowers, and title company to make it work.

Family Member Selling The Home Have To Do on  Gift of Equity on Home Purchase

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 a home purchase, the buyer does not have to come up with any money. The buyer needs to qualify for a residential mortgage loan.

FHA Versus Conventional Guidelines on Gift of Equity on Home Purchase

HUD gift of Equity on home purchase 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 lived in the property for the past six months and are currently living in the property, the seller can gift you a 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.

Gift of Equity on Home Purchase Tax Consequences

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 how the gift of equity transactions can affect their tax liabilities

Consult With Tax Advisor on Gift of Equity on Home Purchase Transactions

Be aware that there are potential tax consequences for gifts of equity. Homebuyers and sellers should discuss the particulars with a tax advisor or qualified accountant to understand how it can impact them specifically. Depending on the 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 that may be avoidable without having to pay gift taxes.

Allowable Gifts Between Sellers and Homebuyers

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 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 has 5% of their own funds for the down payment of the gift of equity home purchase.

Gustan Cho Associates are experts at structuring gift of equity on home purchase transactions. Gustan Cho Associates are mortgage brokers licensed in 48 states, including Washington, DC, Puerto Rico, and the U.S. Virgin Islands. The team at Gustan Cho Associates has a national reputation of being able to do mortgage loans other lenders cannot do.

Please contact Gustan Cho Associates for more information on structuring a gift of equity mortgage loan at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The Team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.