Unlocking the Gift of Equity’s Power: A Generous Path to Homeownership

Unlocking the Gift of Equity’s Power: A Generous Path to Homeownership

There are many ways to attain homeownership — different loan programs, varied interest rates, and numerous types of down payment options. The best choice for one person or family may not be suitable for another.

One of the paths to becoming a homeowner is through the gift of equity from the seller to the buyer.

What Is a Gift of Equity?

A gift of equity occurs when two close parties (usually relatives, such as parent to child or sibling to sibling) enter into a homebuying contract where the buyer purchases the property from the seller for a reduced sales price. The market price minus the selling price equals the gift of equity.

How a Gift of Equity Gets Buyers Into Homes

The gift of equity amount can typically be used as a down payment on a mortgage loan, instead of coming up with the cash itself. Having equity in hand can make it easier for a borrower to secure a mortgage loan.

How Do the Parties Set Up a Gift of Equity?

The process for setting up a gift of equity is straightforward.

  • The seller draws up a gift of equity letter that states they are gifting equity to the person receiving the gift. In addition, the letter should include the property’s selling price.
  • The seller must pay for an appraisal of the property and include it in the letter.
  • The buyer and seller sign the letter.
  • They present the letter to the lender during the mortgage approval process.

What Are the Benefits of a Gift of Equity for the Buyer?

As you can imagine, buyers can reap several big advantages when they receive a gift of equity.

  • Lower (or no) down payment
    Since the gift of equity can be used for the down payment, buyers don’t have to struggle to come up with several thousand dollars to secure a mortgage loan.
  • No real estate agent commissions
    Agreeing to buy/sell a property between family members rarely requires an agent, which saves a percentage of the home price that would otherwise be paid out as a commission.
  • No costly private mortgage insurance (PMI)
    When a borrower pays less than 20% down, they are usually required to pay PMI that can add quite a bit to every monthly mortgage payment. A gift of equity helps avoid this cost.

What Are the Benefits of a Gift of Equity for the Seller?

You may be asking, “Why would a seller agree to do this?” Some benefits of giving a gift of equity to a buyer are:

  • Sellers set their relative up for success. By starting them off with a reduced mortgage, sellers put them miles ahead on their journey to a financially secure future.
  • It allows for a gift without shelling out cash. Instead of cleaning out a savings account to offer your loved one a gift, you can bestow equity that has never been finitely “seen” before.
  • It makes the home sell faster. Instead of putting the property on the market, showing it and negotiating with unknown potential buyers, a gift of equity speedily moves the process along.
  • It keeps it in the family. If the property has sentimental value or has been in the family for generations, a gift of equity may be a better option than selling it to a total stranger.

A Gift of Equity Does Not …

  • Change the lender requirements (like income, debt-to-income ratio and credit scores) the borrower must meet to get a mortgage.
  • Alter the amount of property taxes or insurance a borrower must pay.

Does Your Path to Homeownership Include a Gift of Equity?

While a gift of equity isn’t feasible for every homeowner, you should consider it if a close family member owns a home you’d like to buy. It can offer some compelling benefits that can help you get a loan on a property without saving the full down payment. As always, consider all your homebuying options before making a final decision.

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