FHA Gift of Equity Loans

By
Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

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FHA allows for sellers to gift to the buyer part of the equity of the house that they are selling. This is called a gift of equity, but can only work between those that are relatives. This gift can be used for both the down payment and the closing costs. All other FHA guidelines apply to this type of purchase. ie. Credit qualifying and income.

Keeping in mind again that this can only be done amongst relatives. 

 

How is this achieved?  There are 2 ways for this to happen. And keep in mind that both the seller and buyer have to be a relative of each other.

 

        1.  The 85% rule which is the easiest and quickest.  If I am the buyer, I could buy my sister's house but my loan amount can't exceed 85% of the value of the house. I would also be able to get the full 6% seller contribution from the seller. It doesn't matter if you show it as a 6% seller contribution or just as a gift of equity, it's all the same and coming from the same place. The bottom line is that it gets deducted from the seller's proceeds of the sale.

EXAMPLE

 

Purchase Price of Home (sales price)

$100,000

Maximum Mortgage Amount  (x 85%)

$85,000

Seller owes on current mortgage 

$60,000

Seller’s net profit/walk away after settlement   

$25,000

If seller was going to gift closing costs?   (a)

$6,400

Seller’s total net profit after closing costs paid  (b)

$18,600

 

 

Borrower’s total out of pocket monies

ZERO

 

 

   (a)  This is just a basic example of what closing costs might be. They can drastically vary depending on the state and also on how many points the borrower wants to pay.

   (b)  There will still be added expenses from the seller. ie. Title insurance, closing fee, sewer, water, etc, etc.

  
***The seller does lose that equity which is the difference between the purchase price and the loan amount. Hence the reason why they call if a gift of equity. You are giving up that part of the equity that you had owned.*** 

 

         2.   The higher LTV (loan to value) rule. If the relative buying the so-called property also currently lives in the property, then they can go over the 85% threshold. The borrower would need a lease on the property and prove that they have lived there for 6 or months. This can be done by showing their driver's license, current utility bills, cable, etc, etc. Anything that can show 6 months of residence. And by doing this, the buyer will be able to utilize FHA's max financing programs.

 

 

Bonus : You can also have the seller co-sign for the borrower. Even though this person won't be living in the property. They can follow the normal non-occupant guidelines through FHA's financing. For these guidelines, please read : FHA -- Non-Occupant Co-Borrowers

 

DISCLAIMER :  Make sure that you consult an accountant or reputable CPA on any type of gifts, may it be a gift or a gift of equity. Thanks to Bruce Bourgault for bringing this up. 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Rainmaker
233,806
Marlene Bridges
Village Real Estate Services, Inc. - Laguna Hills, CA
Laguna Homes|Laguna Condos|Laguna Real Estate
Jeff - You sure know your FHA and you explain it so well.  Thanks for enlightening me on this feature.
Jul 19, 2007 07:41 AM #1
Rainer
65,319
Bruce Bourgault, Vice President, Mpro
Central Pacific Homeloans - Honolulu, HI
Jeff Another great FHA post.  I do believe in this case there would be some tax problems for the seller as the equity is $15,000.  You should caution anyone doing this to check with their tax professional before doing this.  ps.  I gave you a 5! Aloha
Jul 19, 2007 07:44 AM #2
Rainer
113,391
Provadus Home Loans
Provadus Home Loans - Marietta, GA
Technology bringing you home.

Great info for us FHA geeks.  Look forward to many more useful bloggs.

Jul 19, 2007 07:48 AM #3
Rainer
70,932
Thomas Weiss
Thomas R. Weiss - West Palm Beach, FL

Jeff,

Really good breakdown, I have used FHA gift of equity before, people who bypass FHA as an option are making mistakes.

 

Take care,

Tom

Jul 19, 2007 08:27 AM #4
Rainer
39,748
Shane Sarae
Honolulu, HI
Thank you very much for sharing, that is good information!
Jul 19, 2007 12:51 PM #5
Rainer
33,786
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC
Great post Jeff.  This is how I bought my first house....gift from my mom and grandmother for $40k equity.  $10k from each over 2 years.
Jul 19, 2007 01:03 PM #6
Ambassador
3,039,619
Jeff Dowler
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude - Carlsbad

Jeff - thanks for clarifying these issues on FHA loans. I was fairly sure I understood but this really helped make sense of it all.

Jeff

Jul 19, 2007 05:34 PM #7
Ambassador
745,649
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Marlene.....  thank you very much, I truly appreciate those comments. I will admit, writing these types of posts certainly keep me on my toes also.

Bruce.... you bring up a very good point and I forgot to mention this. So I will go back and do this. Now... I am not 100% sure if the tax laws would be any different if someone gave up equity in their property. But again, great point and thanks for the compliments.

Erik.....  FHA geeks and money geeks.... lol  thanks....

Tom W. ......  just the other day I saw a person in a mortgage communities post state that you could do a 95% ltv with a 5% gift of equity on a conventional deal. I think this is totally incorrect, unless FNMA changed. But on most of their programs, you need 5% of your own money unless doing a 97% flex deal or the 100% deal. I don't know of any other program that is this lenient when it comes to gift of equity programs.  thanks for the compliment. 

Shane.....  my pleasure and thanks for stopping by.

Melissa..... thanks for the compliment.  But I am semi confused on your answer about the 10k each over 2 years. Is there something else that I don't know about?  thanks

Jeff D. ......  thank you very much. You are one smart realtor.  ;o)  Seriously....  not even a lot of loan officers understand on how this works.  thanks

Jul 20, 2007 03:14 AM #8
Rainer
33,786
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Jeff - yes, of course.  The IRS will only allow a maximum gift per year to any one person before it is taxable.  Back when I bought the house it was $10k per year, so we had to split it up per person over two years.  As of 2006, the limit is $12k.  You can read about Gift Taxes from the IRS.  Sorry about the confusion.  I am a retired Public and Corporate Accountant.  I know we can't advise our clients on Tax Issues, but I recognize so many that I incorporate them into my Mortgage Consulting.

All the best!

Jul 20, 2007 04:38 AM #9
Anonymous
Tom Sr

Using your example where the seller received $18,600 as the net receipts, are the tax implications discussed in comments with the $18,600 or with the sellers gross net amount of $25,000?  The comments of an allowable of $10,000 gift per year would then be subtracted from either the gross amount or the net amount of $18,600. This is where a tax professional needs to advise the seller, am I correct?

 

May 06, 2008 04:55 AM #10
Rainer
26,964
Laura Moore Godek
Laura Moore Godek, PC - McHenry, IL
I have seen only a few of these work in real life.
May 07, 2008 06:58 PM #12
Anonymous
Robin

Does the seller lose any money in the end by giving a gift of equity?  We are currently buying a house from a family member and they want exactly what it's appraised for and don't owe anything on the house.  Does this come out of the money they are paid in the end? Any more info. would be helpful. Thanks!

May 30, 2008 12:38 PM #13
Rainmaker
120,823
Richard Sweum
1st Security Bank - Everett, WA

Great reminder.  We have to utilize all of the tools available to us to make deals happen.  FHA has tremendous capacity for making transactions happen!

Jun 03, 2008 05:08 AM #14
Anonymous
Anonymous

JEff, in regards to the high ltv rule.  what is the highest ltv allowed?  I'm looking to do 95%.  my deal: the parents are selling to daughter.  the parents will also be non-occ-coborrowers.  I was told that the LTV couldn't be over 75% on this deal.  any truth to this?  thanks, Andrew @ Benchmark Mortgage Group - Bel Air, MD

Nov 16, 2008 11:43 AM #15
Anonymous
Tracy Davis

Help!  We are in the process of trying to sell the house occupied by my husband's ex-wife.  Does this qualify as a relative for the gift of equity?  I don't think so but a loan officer has introduced this to her as a possibility.  Also can some one tell me, where is this extra 25,000 going to come from, and does it go directly to the purchaser or toward her down payment?  And now finally I see that if this does all pan out that my husband and I will have to pay taxes on this "gift" as it is over 12,000.  Any recommendations?  My gut tells me not to go this route, if it is even possible as we are not relatives.

Thank You

 

May 17, 2010 02:44 AM #16
Anonymous
Margie

Hi, I am researching gift of equity because my husband and I are considering purchasing my parent's home.  I will try to be as specific as possible so that you have all the facts to hopefully help my understanding.  Firstly, your information above talks about higher LTV percentage for someone who currently lives at the property.  My husband and I have lived in the the home with my parent's for over 2 years so that would apply to us.  My understanding of the current IRS gift laws is that the annual amount is now $13k, so essentially from what I understand my parents could give us a $52k gift of equity without worrying about gift tax ($13k per parent to each my husband and myself).  Based on current home values in the area and an appraisal my mom had done a few years ago to refinance, we expect the value of the home to fall between $340k and $350k.  If we hypothetically take the $350k figure and the max gift of equity, they could sell us the property for $298k.  What I think I am confused on then is how the loan is layed out....is it considered a $350k loan with a $52k down payment or is the loan amount the $298k and then the "down payment" is applied from that.  I am trying to determine how much, if any, I would need to have to add to the down payment to avoid the PMI.  I have a very specific range in which I would be comfortable with a mortgage payment and not having PMI would help me stay well within that range.  Any insight would be appreciated.

Jan 10, 2012 07:38 AM #17
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