If you’re thinking about buying a home from a family member, you should take a quick look into how you can benefit from a Gift of Equity.
What is a Gift of Equity?
The “equity” in a family member’s (the seller’s) property can be “gifted” to serve as your (the buyer’s) down payment, whether it is your entire down payment or a contribution to your own money. Unlike gift funds, a Gift of Equity is simply transferring the seller’s equity of ownership to you as the buyer. There is no hard money wired from them to you or a check made payable to you.
A common situation is where parents want to sell their property and their son or daughter is interested in purchasing the home to occupy as their primary residence. The parents may own the property free and clear of any mortgage and is not excited to pay a real estate broker commission to sell the property. Additionally, the parents do not want to deal with open houses, not knowing when they can complete the sale, and the need to constantly keep their home in a “showing” state.
How does a gift of equity work?
Now that you understand how you can benefit from a Gift of Equity, here is an example with some finer details:
- The seller is ready to sell a property with a value of $250,000.
- The seller owns the property free and clear of any mortgage debt.
- The seller does not want to pay a broker commission, usually 6% of value ($15,000).
- The seller will give a Gift of Equity of 5% of purchase price ($12,500).
- The seller will net at most $237,500 from the sale (minus their seller closing costs).
- The buyer will purchase the property for $250,000.
- The buyer will receive a Gift of Equity of 5% of the purchase price ($12,500).
- The buyer will need a mortgage loan for $237,500.
- The buyer must get pre-approved for this mortgage!
- The buyer will need money assets for their buyer closing costs and reserves.
Important factors to make a gift of equity work:
- There must be a family relationship between seller and buyer.
- There must/will be a signed purchase/sales contract between seller and buyer.
- There will be an attorney or attorneys who represent the seller and/or buyer.
- There will be a signed gift letter between the seller and buyer.
If you are considering purchasing a home from a family member, call me at 773-869-6695 to discuss your situation in more detail and to understand the next steps in your plan.
In addition, if you're not sure where to start your home buying journey, download our free First-time Home Buyer Guide to learn everything you need from searching for a home to closing the deal.