Can you imagine how exciting the gift of a home would be? We’re not talking a plastic playhouse or an elaborately crafted dollhouse wrapped up in a bow, either – we mean a real house. 

While it may seem far fetched to some, it’s not all that uncommon, and can be done using a gift of equity.

What is equity, you ask?

To understand a gift of equity, we need to first talk over the concept of equity itself.

Equity is the appraised value of your house minus the remainder of what is owed on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on the mortgage, you have $100,000 in home equity. 

A gift of equity comes into play when a family member’s (the seller’s) equity in their property is gifted to act as the buyer’s down payment. Depending on the amount, this may cover the entire down payment or serve as a contribution to the money a buyer already has saved or available. 

This is also one way that a house can be sold for under market value to a family member, which can allow for a buyer to purchase a better home in a nicer area than they might otherwise be able. 

What does this look like?

Jim and his wife, Pam, are ready to start a family and have decided that their one-bedroom apartment will not be large enough for them anymore. They are ready to buy! 

They talk with a Mortgage Lender and find that they are pre approved for a $250,000 loan. Jim and Pam are excited to begin their house hunt, but after looking at home after home with their real estate agent, they just can’t find anything in their price range that they love.

Jim’s grandfather, Dwight, lives in the home he built and raised his family in. He has been considering downsizing for some time, but hates the idea of letting his family home be sold to a stranger and therefore lost to his future grandchildren.

After talking to Jim and learning that his grandson was looking to buy a forever home, Dwight has an “ah-ha!” moment.

Dwight knows that his home is worth $300,000. He owes $200,000 on the mortgage and has $100,000 in equity. 

He can sell the family home to Jim for $300,000, and gift $50,000 of his equity to serve as Jim’s downpayment! 

This is a win-win for both Jim and Dwight. 

Jim gets to live in a much nicer home than he could otherwise afford, because although he was approved for a $250,000 loan, he did not have much money saved for his down payment. The $50,000 gift means that Jim won’t need to bring a cash down payment at all AND he can stay within his budget! 

Dwight gets to downsize without having to sell his family home to a stranger, and because he was planning on leaving Jim a bit of inheritance already, he considers the $50,000 gift as part of his legacy.

With the remaining $50,000 of equity in the home, Dwight can keep some cash for his own move to a smaller condo (or whatever else he may want to do.)

Jim and Pam are so excited that they vow to name their first child after Dwight. 

The main benefit of a gift of equity is for the buyer

As you may have learned from Jim and Dwight, the buyer is receiving a very generous contribution from their family member and clearly benefit the most from this transaction. Receiving a house for below market value and/or having your down payment covered is no small thing!

But there are actually benefits to the seller, too. 

These include a quicker sale (because they already know who is buying their home, they don’t have to wait around with their house on the market indefinitely) and the possibility of keeping a well-loved home in the family.  

Another possible benefit (though not limited to gift of equity scenarios) is that, because this type of transaction does not have to involve a real estate agent, the seller may save up to 6% in commissions paid. For example, if a house is $250,000, this savings can equal out to $15,000 kept in pocket! 

Keep the following requirements in mind…

There are requirements when it comes to a gift of equity that have to be met. Some of these requirements include:

• • • A contract including specific language, stating:
      • • • The relationship of the parties
          • Gifted equity amount
          • Any seller paid closing costs

• • • A completed and signed gift of equity letter.
      • • • Mortgages have specific requirements for terminology in gift letters.  The gift letter must show the donor’s name, address, phone number, the dollar amount of the gift, the relationship between the borrower and the donor, and must state that no repayment is required. 
          • Here is an approved gift letter format that you can use to get started!

• • • Finally, there must also be equity in the property
      • • • This is an obvious requirement – you can’t give what you don’t have! 

Two more things to note

• • The gift of equity is subject to appraisal

• • • • • An appraisal does two things; it prevents a buyer from overpaying and is also for a lender to help protect the value of a home. 

• • • • • While a home could be said to be worth $750,000 by the seller, it may only truly be worth $500,000 upon appraisal. This is important because if a family member was planning on selling the home for 450,000 using a gift of equity, the gift would be $50,000 and not $300,000 

• • A gift of equity is not allowed when the seller is an estate. 

• • • • • This is even true when the buyer is family of the deceased, and ownership of the property will be subject to a Will. (See the deed requirements for an estate.)

This can seem confusing at first, but OVM’s Loan Officers are experienced in this type of transaction and can help you through the entire process from start to finish. If you are considering buying or selling a home utilizing a gift of equity, reach out to our team today!