What is a gift of equity?
A gift of equity is when the home is being sold to a family member below the current market value. The difference between the market value and the actual sales price is the gift of equity.
This is not really a gift of dollars and there is no real money exchanged (only equity is transferred as a credit to the buyers, not dollars)
A gift of equity may be used for ALL of the funds needed to complete the transaction such as to pay the below:
Buyers closing costs
Can be used to pay down the loan 20% to remove the mortgage insurance
What types of homes can this be used for?
Primary and second homes (gifts are not allowed for investment properties)
Cannot do with a VA loan
Who can give the gift of equity?
Child or other dependent
Related by blood, marriage, adoption, or legal guardianship
Fiancé or domestic partner
If there is enough gift of equity, what would be required out of pocket money by the buyer?
Home inspection if wanted but not required by the mortgage company
How do you document the gift?
Write it on the contract as “the seller is to give the buyer a gift of equity of _________________”
Gift letter from the mortgage company must be completed
The gift goes on the closing disclosure as a gift
How do you write the contract?
The market value is the purchase price of the home
The binder amount could be zero
Must write on the contract “seller to pay 3% of buyers closing costs and prepaids”
Extra points to remember for the transaction
Must appraise for the market value which is the purchase price
Could lower the buyer’s rate since they “get credit for the down payment”
How do you calculate the gift of equity?
- What is the market value of the property which is written on the contract as the purchase price?
- Multiple market value by 3% for the seller to pay for the buyers closing costs.
- What does the seller want to sell the home for?
- Add together #2 and #3 to get the loan amount
- Market Value (#1 above) minus the loan amount (#4 above) is the gift of equity