Buying from a relative — the gift of equity

by Gina Pogol
February 24th, 2011

One way that FHA loans make buying a home easier is that their guidelines allow gift funds from relatives to help with the down payment on a home. A gift can be cash or home equity.

For example, parents call sell a home to their child and the child can purchase it with an FHA loan without a down payment as long as the sales price is at least 15 percent less than the appraised value of the property.

To document this gift, your fairy godparents must write a letter to the lender that includes the following information:

1. Name, address, and phone number of the donor

2. The amount of the gift of equity

3. The letter must include a statement that the equity is a true gift; that is, no repayment is required

4. The donor must specify his or her relationship to the buyer

Your loan to value is lower when you buy from a family member

FHA requires that when a sale takes place between family members, the mortgage cannot exceed 85 percent of the sales price. There is no set maximum or minimum gift, but if the equity gift falls below 15 percent, you must make up the difference in cash. For example, if the purchase price is $200,000, the maximum loan amount can be $170,000. If your relative wants to get $190,000 from the deal, you’ll have to come up with $20,000 down.

An alternative

Another alternative for those whose relatives don’t want to give the whole 15 percent is to just have your relative drop the sales price. In our example, that would be to $190,000. With gift no equity,  you only have to come up with 3.5 percent, which is $6,650.

If your parents are also co-signing for you

If your parents, the sellers, are also functioning as non-occupant co-borrowers, the maximum loan drops to 75 percent of the sales price. So your parents would then have to gift 25 percent of the price or you’d have to come up with that much more money down.

There are to increase the allowed loan to value

You can get around the higher LTV requirements by doing one of the following:

1. If one or both of your parents continue to live in the home with you, you are both on the deed and the LTV reverts to 96.5 percent. This is normal when an aging parent sells to a child, who moves in with him or her.

2. The other way to get a higher loan amount is if you rent the home from your relative for at least six months immediately before the sale. You should draw up and fully execute a lease agreement. Be prepared to provide proof of on-time monthly payments like bank statements or canceled checks.

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