Gift of Equity Home Purchase By Family Members
In this article, we will cover and discuss the gift of equity home purchase by family members. Many loan officers do not know the guidelines for using a gift of equity home purchase to buy a home.
If many loan officers are not familiar with this process, it must mean it is complicated. Truth be told it is not hard to close a mortgage transaction that involves a gift of equity home purchase. You just need to deal with someone who knows what they’re doing. Gustan Cho Associates is a full-service mortgage lender WITHOUT any LENDER OVERLAYS to get in the way.
We offer FHA, VA, Conventional, USDA, and NON-QM mortgage products. Gustan Cho Associates are experts when it comes to gifts of equity home purchase. In this blog, we will detail the gift of equity home purchase guidelines for the different loan products and how to start the process? The rules and regulations in buying a home by a family member and getting the down payment gifted.
What Is Gift of Equity Home Purchase
A gift of equity home purchase involves the sale of a residence to a family member or close friend, at a price below the current market value. The difference between the sales price and the actual market value of the home creates the “gift”.
The term gift of equity derives its name from the sales price is lower than the real market price of the home. The difference in those figures can be gifted to the new buyer. The gift of equity home purchase can be used as all or part of the down payment/closing costs.
This holds true even though no physical money is exchanged. The use of the gift of equity transactions typically takes place between, two family members. You may utilize a gift of equity for a primary residence or a second home.
How Gift of Equity Home Purchase Works
Whether the donor is giving you gift funds or a gift of equity, the transaction will require a gift letter. This will be signed by both the seller and the buyer. The letter must state the exact amount the donor of the gift of equity home purchase will give the buyer.
The lender will require an official appraisal report. The appraisal must note the true appraised value of the property. The appraisal must include the gift of equity information. This paperwork must include the difference between the actual appraised value and the sale price after the gift funds.
Since the gift of equity home purchase involves selling a home below current market value, the appraisal must state the true appraised value of the property. The majority of the time the gift of equity home purchase process is used when a parent sells their home to one of their children.
Who Can Give Gift of Equity?
Just like anything else in life, there are pros and cons to utilizing a gift of equity home purchase. The obvious Pro is for the buyer.. Typically, they are getting the home well below fair market value. Gift of Equity Home Purchase Buyers are walking into the transaction owing less than the home is worth. Many times, gifts of equity home purchase help the buyer eliminate down payment requirements. The down payment is the main obstacle for potential homebuyers in the United States.
Gift of Equity Pros and Cons
The gift may be large enough that the new owner does not need to pay for private mortgage insurance (PMI). The main Pro for the seller it is the fact that the gift of an asset can avoid IRS gift and capital gains taxes. Please contact your CPA for all tax questions. Gustan Cho Associates are not tax professionals. When the seller is utilizing a gift of equity, they are able to bypass paying realtor commissions for the sale of their home. Many times, the commission can be 5% to 6% of the purchase price of the property, which can add up quickly!
Freddie Mac Guidelines Gifted Equity Home Purchase
Freddie Mac Guidelines on Gift of Equity Home Purchase on Conventional loans:
- Freddie Mac does allow the use of the gift of equity home purchase
- They do require a gift letter to be signed by all parties
- The letter must provide the donor’s name and the amount being given to the related person (buyer)
- The gift letter must include the donor’s mailing address and phone number
- Must state the gift amount does not need to be repaid
- The gift of equity MUST be shown on the Closing Disclosure
- A gift of equity can be used for a primary residence or a second home, NO INVESTMENT PROPERTIES
- To utilize the gift of equity for a second home, the LTV (loan-to-value) and CLTV (combined loan-to-value) must be at or below 80%
- Or the buyer must contribute at least 5%of their own funds
For more information see FREDDIE MAC’S WEBSITE.
Fannie Mae Guidelines on Gifted Equity Home Purchase
Fannie Mae Guidelines on Gifted Equity Home Purchase on Conventional loans:
- Fannie Mae will also allow a gift of equity
- They defined the gift of equity as a gift provided by the seller of the property to the buyer
- The gift comes in the form of backward
- A portion of the seller’s equity in the given property is transferred to the buyer as a credit in the transaction
- A gift of equity home purchase is permitted for principal residences and second home purchase transactions only
The acceptable donor minimum borrower contribution requirements must be met by Fannie Mae guidelines.
HUD Gift of Equity Home Purchase Guidelines
FHA – Are all FHA mortgages, only a family member may provide the Equity Credit as a gift. So, this can only be used when selling from one family member to another family member. This is considered a non-arm’s length transaction. In this case, FHA would allow a maximum LTV (loan-to-value) of 85%. There are a few exemptions to the 85% LTV rule.
If the buyer has been living in the house being purchased with a gift of equity for at least 6 months, then only a 3.5% down payment is required. OR if the family member (SELLER) currently uses the home being sold as a primary residence.
In both cases, occupancy must be documented with a signed lease or utility bills, or something along those lines.
VA Guidelines on Gifted Equity Home Purchase
VA – Only family members may provide Equity credits as a gift on the property being sold to family members. A verification of mortgage must be provided to reflect no more than 29 days delinquent at the time of closing.
A history of any major delinquencies on the mortgage such as 60 days late or greater will require additional information and may not be eligible for this transaction. A spouse-to-spouse purchase is not an acceptable instance event in case of divorce. Simply put, you may utilize a gift of equity with a VA loan.
You must have a gift letter signed by all parties that include the donor’s name, address, phone number the donor’s relationship with the borrower, and the amount of the gift. The letter must also state no repayment is required.
USDA Guidelines on Gifted Equity Home Purchase Mortgage
USDA Guidelines on a gift of equity home purchase- You may also utilize a gift of equity for a USDA mortgage.
- The gift will be applied as a reduction to the purchase price of the dwelling
- This must be on the contract
- It will ensure the appraiser is aware of the gift total
- This will allow the appraiser to properly complete their report, note the reduction, and support the appraised value to the purchase price if applicable
If you are using a gift of equity, the borrower may not receive cash back at loan closing for any reason.
Non-QM Guidelines on Gift of Equity Home Purchase
NON-QM – Utilizing a NON-QM mortgage product is a great alternative for thousands of Americans.
- A gift of equity can also be used for NON-QM transactions
- One of our NON-QM outlets describes a gift of equity as if provided by the seller of a property to the buyer
- The gift represents a portion of the seller’s equity in the property and is transferred to the buyer as a credit in the transaction
A gifted equity may only be used when:
- MAX loan to value is 80% or less
- Full documentation loan (NO BANK STATEMENT LOANS ALLOWED)
- Only used on a primary residence
- The gift of equity must be from a relative, fiancée, or domestic partner with no affiliation to the builder, realtor, or any other interested parties
How To Start The Home Buying Process With a Gifted Equity Purchase
So, you decided to purchase a home from a family member with a gift of equity. The steps are very similar to your everyday mortgage product. You’ll first gather the following information:
- Last 60 Days Bank Statements – to source down payment
- Last 30 Days Pay Stubs
- Last Two Years W2’S
- Last Two Years’ Tax Returns
- Driver’s License
How To Learn More on Buying a Home From Family Member With Gifted Equity Mortgage?
If you have a family member who loves you, you may utilize a gift of equity with just about any mortgage product we offered. Once again, we do not have to deal with any lender overlays to get in the way of our clients’ qualifications.
Gifting equity is a great way to structure a loan where the buyer has a low out-of-pocket (or NO out-of-pocket) expense to buy a home. A gift of equity transaction is far more common than you may think. Gustan Cho Associates have closed many of these files.
As you can see above, we are experts on the topic. Please feel free to reach out to Gustan Cho Associates at 800-900-8569 or text us for a faster response to go over your specific question. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
