Archive for the Gift of Equity Tag

Gift of Equity

Using a Gift of Equity to buy real estate from a family member is becoming more popular. Most Loan professionals do not know how to do this very complex transaction. We have received numerous questions recently concerning the sale of real estate between family members and whether or not the seller may “gift” equity in the property to the buyer. We have identified the growing trend in the transfer of real estate between family members.

There is a huge interest in the Gift of Equity program from First Time Homebuyers who do not have the required down payment. Both buyers and sellers continue to ask us questions about the program and as we have now completed many of these purchases, we are happy to explain the process to you.

First, is it acceptable to give a “gift of equity” when selling real estate? Yes…when it is to a family member. Let’s first examine the Fannie Mae guidelines associated with a Gift of Equity:

• Both conventional and government underwriting guidelines call for the donor (seller) to be a direct relative of the recipient (buyer). a qualified relative is defined as the borrower’s spouse, child, or other dependent, or by any other individual that is related to the borrower by blood, marriage, adoption, or legal guardianship. Finance or domestic partner is also acceptable.

• Fannie Mae and Freddie Mac both ask for the borrower to contribute 5% of the purchase price from their own funds into the transaction. Beyond the first 5%, the borrower may receive a gift of equity. Some programs designed for first time home buyers may allow a minimum of 3% from the borrower’s own funds. If the gift of equity will contribute more than 20% of the sales price, the borrower does not need to document the use of their own funds.

• FHA  permit 100% of the required down payment (minimum – 3.5%) to be derived from a Gift of Equity.
• Every gift, whether a cash or Gift of Equity, must be supported by an executed gift letter; which outlines the relationship between the borrower and donor with all appropriate contact information as well as documentation for the source of funds being used for the gift.

There may be tax issues with the gift and you should consult your tax professional to get better guidance on this.

What is the Process?

When a Family member wants to buy a property from another relative, it begins with going to a local Escrow company. There the buyer and seller will sign a purchase agreement outlining the selling price and other details. In this agreement, the seller will show a credit of say 20% of the selling price as a Gift to the buyer family member.

The loan professional will give you guidance on exactly what is needed to complete the transaction. The program is usually when a person has seen their kids move on and the house is to large for them. Selling to a family member is a simple solution to help get the person into a property as well as the easiest, lowest cost way for the seller to sell the property.

Mortgage Consumer strives to educate our team of mortgage professionals to remain current on trends that affect the real estate industry and benefit our clients. The Gift of Equity program is but one of the many mortgage solutions we offer prospective buyers.