How Does a Gift of Equity Work?
In our decades of facilitating home purchases for our clients and customers, we’ve seen equity gifts help home buyers to purchase houses many times.
Thinking about using a gift of equity to purchase a home? Here’s how they work.
What is a Gift of Equity?
A gift of equity is when a home seller – who has a personal connection to the buyer – agrees to sell their house for a price that is significantly lower than the house’s appraised value. This ‘gift’ – the difference between the appraised value of the home and the price the seller is willing to sell for – is intended to help the buyer purchase the home.
Does a Gift of Equity Apply to My Home Purchase?
If you are purchasing a home from a family member and they are looking to help you out by selling the home to you for less than the home’s appraised value, then a gift of equity may be an option for you.
The best way to find out if a gift of equity can be used to purchase the home you are considering is to talk to your mortgage lender to determine whether you meet the necessary criteria.
Equity Gift Requirements
If you plan to secure a mortgage to finance your home purchase, you’ll need to be sure your gift of equity agreement is in line with the lender’s rules. Depending on how you plan to finance your home, there may be equity gift guidelines you’ll need to follow.
For instance, if you’re financing your home purchase with an FHA mortgage, a gift of equity is only allowed if a property is being sold between family members.
It’s also important to note that a gift of equity is, in fact, truly a gift and not a loan from a family member that will ultimately have to be repaid.
Additionally, the terms of a gift of equity must be outlined in a letter.
Gift of Equity Letters
All gifts of equity must be documented with a letter from the seller that outlines the terms of the agreement. These letters must include the following information:
- Seller’s personal information, including name, address and phone number
- The exact dollar amount of the gift
- An explanation of the relationship between the seller and the home buyer
- An explicit statement that the gift funds are not a loan and will not need to be repaid at any time
What Can a Gift of Equity Cover?
What an equity gift can cover will depend largely on its amount.
Some ways a gift of equity can be used include:
- To cover a down payment
- To cover closing costs
Remember that some mortgages do require minimum buyer contributions, so despite a gift of equity you may be required to put forth some of your own money to cover a down payment. Additionally, if the gift of equity you receive doesn’t cover the down payment, you will be responsible for covering the remainder out of your own pocket.
A gift of equity can also help you meet the down payment requirement that you might not be able to cover otherwise. For instance, a gift of equity PLUS the money you’ve saved to put down on your home could result in your being able to make a larger down payment. This, in turn, could mean that you may be able to qualify for additional loan options or even make you eligible for a conventional loan without private mortgage insurance.
I’m Not Eligible for a Gift of Equity. What Are My Other Options?
If your home purchase is not eligible for a gift of equity or the seller you’re working with is not willing to put forth an equity gift to help ease the financial burden of buying your home, you still have options.
A Down Payment Gift
While a gift of equity is a gesture on behalf of the seller that can be used to cover some or all of a down payment, a down payment gift is something entirely different.
A cash down payment does not (and cannot, for that matter) involve a seller. Instead, a down payment gift is cash gifted by a family member, relative, or close friend of a buyer in order to help the buyer cover the down payment and afford the home.
A Mortgage with Minimal Down Payment Requirements
If neither a down payment gift nor a gift of equity are in the cards for you, another option to consider is a home loan that requires a minimal down payment. USDA home loans and VA mortgages are good options to consider if you’re in this position.
If you’re in this position, it’s also a great idea to work with a mortgage broker in order to explore the home loan options available to you that are applicable to your specific situation.
Buying a Home with a Gift of Equity
A gift of equity is a fantastic option when it comes to making a home purchase more accessible, especially for first time home buyers and those with a minimal amount saved for a down payment.
Preparing to buy a home and interested in using a gift of equity to do so? Get in touch with us today!
Our team of mortgage professionals is experienced in implementing equity gifts and familiar with a wide variety of home loan options. We can examine your exact home buying scenario and help you determine the best way to go about financing your home purchase.
And, because we are a broker, we have access to home loan options that many other banks and lending institutions can’t offer to the general public. We can help you find a mortgage option that truly works for you and your budget – in many cases even if your credit is less than ideal.
Give us a call today at 518-782-1202 or contact us online to get the conversation started.
Ready to take the first step toward home ownership? You can begin the mortgage application process here today!