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:

A gift of equity in the context of a home purchase occurs when a homeowner sells their property to a buyer with whom they share a close relationship, typically a family member or a dear friend. This involves the seller offering the home at a discounted price, meaning the property is sold below its market or appraised value. By selling the home at a value lower than its market worth, the buyer acquires immediate equity in the property upon 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

Often, an older parent may express the desire to transfer the family home to their son or daughter at a price significantly below the market or appraised value. In instances like these, the seller is selling their property to a son, daughter, or relative at a value below the market rate. Dale Elenteny, from Gustan Cho Associates, elucidates on individuals eligible to provide a gift of equity in a 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.

Receiving a gift of equity when purchasing a home can assist the buyer in avoiding the need to provide the entire or a portion of the down payment, thereby easing constraints on the home purchase. Lenders typically mandate a formalized gift of equity letter, which must be signed and include specific language.

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How Gift of Equity on Home Purchase Works

Typically, in purchase transactions involving a gift of equity, the seller disposes of the property to a buyer who is a relative at a discounted rate. The amount below the market price or appraised value can serve as a gift of equity for the homebuyer, thereby restricting the down payment required from them.

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.

Obtaining a gift of equity for a home purchase is a straightforward process, akin to a standard home buying procedure. The mortgage company’s loan officer will collaborate with the seller, borrowers, and title company to facilitate the gift of equity on the home purchase.

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

If there is a sufficient gift of equity, the home buyer will not be obligated to make a down payment. As previously mentioned, the seller must complete a gift of equity letter using the appropriate language provided by the mortgage lender. This letter or form explicitly declares that the seller is gifting equity to the borrower, and this gift is non-repayable under any circumstances. Additionally, the seller may choose to cover the closing costs for the home buyer. In cases where there is adequate equity in the home purchase, the buyer is not required to contribute any funds and must still qualify for a residential mortgage loan.

FHA Versus Conventional Guidelines on Gift of Equity on Home Purchase

The guidelines for HUD’s Gift of Equity on home purchases specify that if the buyer has not resided in the property being purchased through a gift of equity in the last 12 months, the seller is required to gift 15% equity. However, if the buyer has lived in the property for the past six months and is currently residing there, the seller can provide a gift of 3.5% for the down payment. In the case of conventional loans, there is no restriction on the amount that can be gifted, and it can be done by a relative regardless of whether the buyer has lived in the property before purchasing it.

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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

It’s important to note that gifts of equity may have potential tax implications. Homebuyers and sellers are advised to engage in a conversation with a tax advisor or a certified accountant to grasp how these implications can affect their circumstances. Depending on factors such as tax brackets, the number of dependents, and marital status, there may be strategies available to mitigate the risk of substantial gift taxes or taxable gift taxes, offering a potential avenue to avoid such payments.

Allowable Gifts Between Sellers and Homebuyers

Gifts from family members are subject to certain allowances. For instance, an individual is authorized to bestow a gift to another individual amounting to $12,000 annually without having to report it to the Internal Revenue Service. There exists a cumulative gift limit of $1,000,000 for a recipient over their lifetime. In cases where a recipient is receiving gifts from both parents, each parent is entitled to gift the child $12,000, resulting in a combined total of $24,000 for that specific child. Any excess gift beyond this limit can be carried over to the subsequent year until the child reaches a maximum lifetime gift amount of $1,000,000. Prequalify for a mortgage  loan in just five minutes. 

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 specializes in effectively structuring gift of equity in home purchase transactions. As licensed mortgage brokers operating in 48 states, including Washington, DC, Puerto Rico, and the U.S. Virgin Islands, Gustan Cho Associates has garnered a nationwide reputation for successfully securing mortgage loans that may pose challenges for other lenders.

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. Prequalify for a mortgage in just five minutes. 

FAQ: Gift of Equity on Home Purchase Mortgage Guidelines

What is the gift of equity on home purchase? A gift of equity occurs when a homeowner sells their property to a close relative or friend at a discounted price, below the market or appraised value. The buyer gains immediate equity in the property upon purchase.

Who can provide a gift of equity on a home purchase? Home sellers who can provide a gift of equity are typically eligible to offer it to family members, including legal siblings, parents, grandparents, legal guardians, and spouses.

How does the gift of equity work in a home purchase? In a gift of equity transaction, the seller sells the property to a relative at a discounted rate, serving as a gift of equity for the buyer, reducing their required down payment.

Is a gift of equity a complex process? Obtaining a gift of equity is a straightforward process similar to a standard home-buying procedure. The mortgage company’s loan officer will assist in structuring the transaction.

Does the home buyer need to make a down payment in a gift of equity transaction? The buyer may not need to make a down payment if there is sufficient gift of equity. The seller must provide a gift of equity letter declaring the non-repayable nature of the gift.

Are there different guidelines for FHA and conventional loans regarding gift of equity? Yes, FHA guidelines specify gift amounts depending on the buyer’s residence history in the property, while conventional loans have no such restrictions and allow gifts from relatives regardless of the buyer’s history.

Are there tax consequences for the gift of equity transactions? Gift of equity transactions can have potential tax implications for both buyers and sellers. Consultation with a tax advisor or accountant is recommended to understand the impact on tax liabilities.

Are there limits to the amount of allowable gifts between sellers and homebuyers? There are annual and lifetime limits for gifts from one individual to another. An individual can gift up to $12,000 annually without reporting it to the IRS, with a maximum lifetime limit of $1,000,000.

How can I prequalify for a mortgage loan in such transactions? You can prequalify for a mortgage loan by filling out a quote form provided by your mortgage lender.