How Does Gift of Equity Work?

Sometimes, it’s nice to know your loved ones have your back. And when it comes to one of the largest expenses of your life—buying a house—it can be doubly sweet. When a family member or close associate sells you their home at a discounted rate, that is called a gift of equity. A gift of equity is the difference between the home’s market value and the price offered to you by your family member or loved one.

There are a lot of reasons that family members do this. It is common for parents to ‘gift’ a house to their children—whether it be so they can upgrade themselves or keep it in the family. This gift of equity acts as a down payment, making it easier for you to get a home mortgage. It is different than, say, if a family member paid your down payment for you because there already exists some equity in the house.

This article discusses what a gift of equity is, how it works, and the requirements for getting one. We will also cover some frequently asked questions and the pros and cons of a gift of equity. If this is something that may be an option for you or if you are interested in selling your home to a relative, scroll on!

What is the gift of equity?

A gift of equity is selling a house below its market value, usually to a relative or close associate. Most lenders count a gift of equity as a down payment on a home for the buyer. No physical money changes hand. A gift of equity helps buyers by reducing (or entirely eliminating) the down payment required making it easier to get a mortgage to purchase a home.

Most of the time, it is made by parents or relatives, but not required. A friend or close associate can also give gifts of equity.

How does a gift of equity work?

So, if no money is exchanged, how does it work? Why is it called a gift? In a gift of equity, the sale price of a home is much lower than the market price. Say you wanted to sell your home to a family member and cover a 20% down payment. Instead of just cutting a check for that amount of 20%, you would just reduce the house’s sale price by that amount.

According to the Federal Housing Administration (FHA), the gift of equity must cover a minimum of 3.5% of the down payment, as long as the home is the primary residence of the buyer.

What are the requirements for a gift of equity?

There are few basic requirements for a gift of equity. One is a gift of equity letter, a letter signed by both parties and details the facts and components of the sale. In addition, there are some other requirements as well:

• There will need to be a sales contract completed and signed.
• An official paid appraisal must be completed on the home, usually arranged by the seller.
• The appraising officers have to note the appraised value of the house and the gift of equity price.
• All the paperwork has to include the appraised value and the gift of equity value.
• Another letter noting the gift of equity will be needed at closing.

Some lending institutions may require a certain minimum credit score. Hence, it is a good idea to call and ask, along with finding out any specifics the institution may require from you or the seller.

What are its benefits?

There are a lot of benefits to a gift of equity for both parties. There is an ease about the process that is not available in traditional home buying and selling procedures.

First, you don’t have to really market your home or even list it. You already know who the buyer is. So once you get the lending institution on board, you’re free to move to your next adventure. You also don’t have a contingency when you find a new place.

Secondly, neither party needs a real estate agent. This can save a lot of money in terms of commissions and the stress of going through the home buying and selling process. It really takes out the middle-man.

For the buyer, a huge benefit is that there is a lower or no down payment required. Especially for a first-time home buyer, it can really make a difference. And the seller gets to do a nice favor for a family member or friend.

Are there any disadvantages?

Unfortunately, there are some downsides to gifts of equity. These disadvantages are things to consider before going into the process. However, they are not, by any means, invalidating the process.

First, there are some fees to consider. Gifts of equity aren’t immune to closing costs or title transfer expenses. And the contract mentioned earlier? There is going to be a legal fee for a representative to draw up the contract.

Secondly, gifts of equity will increase the capital gains of the house for the recipient when they sell it down the road. It may also influence the local real estate market, as it is being sold under market value.

Thirdly, it might result in a gift tax trigger. A gift tax is a federal tax on any valuables given from one person to another. It primarily affects the seller, as they are the ones to claim it on their tax return as a gift.

Frequently Asked Questions

When it comes to gifts of equity, there are a lot of questions you probably have. We’ll try to answer them all here, but be sure to reach out to a trusted professional to answer any specific questions. But here are some basic questions:

Do you pay taxes on a gift of equity?
As the recipient/buyer? No. As the giver/seller? Yes-ish. When you give a gift of equity, you have to claim it on your next tax return. But just because you claim it doesn’t mean you will have to pay taxes. It depends on the amount of the gift and the other factors of your taxes.

Can a gift of equity be used to pay off debt?
A personal debt? Sure—if you owe one to someone and use a gift of equity to clear the slate. When it comes to financial loans (actual debt or other loans), no. Gifts of equity are put towards the down payment and other house buying-related costs. It can’t be used on other loans.

Can you use a gift of equity on a second home?
It depends. Some lending institutions may allow second-home gifts of equity, others may not. And those that do allow it may have more requirements of who can be the recipient and that the house has to be the primary residence. On second-home gifts of equity, a common requirement is that the recipient is related by blood or marriage in some capacity.

Does a gift of equity have to be paid back?
Nope! It’s a gift. There is a mutual understanding that the difference between the market price and the price is gifted and will not need to be paid back. Nor is it expected. A gift of equity is not a loan, so the recipient doesn’t go into debt for being given one. The mortgage loan taken out on the home from the lending institution has to be paid back, remember. But the gift itself does not.

Wrapping it up with a bow

Whether or not you put a bow on the house is your call. A gift of equity can be very helpful and beneficial for both parties in a variety of ways. When it comes to the cons of the situation, be sure to factor in those costs before proceeding.

Of course, if you have any specific questions regarding buying a home, be sure to reach out to the experts at Hero Home Programs. They help home buyers save thousands of dollars on the home buying journey and can answer any home buying questions that you might have.

How Does Gift of Equity Work? See more on: https://www.herohomeprograms.com/

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Does a Bigger House Make You Happier?

Sometimes, if you had just a bit more space, everything would be so much easier. When you need an upgrade, there are times where a major overhaul of space can be necessary. And what qualifies as a ‘big’ house is rather relative, depending on your current space and what you consider to be spacious.

So can a larger house really make you happier? We look at the benefits of a bigger house versus the benefits of a smaller house. It is important to look at everything from your personal situation before choosing the size in terms of needs and financial capability. Ultimately, whether a bigger house will make you happier depends on - well, you.

Benefits of a bigger house

There can be a lot of upsides to a bigger home, and it depends on what you intend to use the space for and who you want to share the space with. It is important to keep in mind that larger homes usually have bigger price tags, and larger monthly mortgage payments can actually cancel out the ease of more space if you are struggling to make ends meet.

1. More space

The obvious benefit of a bigger house is space! And that can be helpful in simply how you live and move in this world. When you have space to exist and fit into space, things can seem to just flow better. Not to mention, bigger spaces come with other amenities and appliances, such as a dishwasher or laundry, making two chores significantly easier to accomplish.

2. Life transitions and milestones

Sometimes, it is just time to get a bigger space. Wherever you are in life, getting a bigger house can align better with your goals and where you are headed in the future. For example, you might be getting married or making arrangements for kids. When more people start entering the equation, more space is a better option so that everyone can experience comfort.

Other times, you may just want to get out of a shared living space. Maybe that is with your parents, a roommate or five, or another living situation. A bigger house can give you a sense of personal space that is not afforded in a place shared with other people.

3. Home office/gym/studio

Having more space can make life a lot easier when it comes to work and leisure. If you work from home or are looking to start one, having a home office can make a difference. Having a separate room from work that exists separately from the rest of the house can help clear physical boundaries for work.

Other amenities like having a home gym or studio for art, yoga, gaming, or whatever your needs are can be realities with a bigger home. If you are someone who wants to work out before starting the day and having a home gym would make that a lot easier for you, a bigger home can provide that for you. Or, if you want to have a space to meditate or craft or stream or just simply pursue your hobbies and interests, a bigger house can be beneficial.

4. Yard space

Having your own yard can benefit and give your family an experience of the outdoors and green space. Or, if you are a fan of summer barbecues and larger outdoor gatherings, a yard can allow for you and your guests to be comfortable and spread out.

Benefits of a smaller house

There are some upsides to having a smaller house. If you are just looking for a starter home, then smaller houses may be better for your situation. Again, depending on your finances, life goals, and current living situation, a smaller house may be better. You might be surprised at how much more space you have in just simply moving from a 500 square foot apartment to an 850 square foot house. There are a lot of benefits to a smaller house.

1. Lower costs

Smaller houses cost less because there is simply less space to pay for so, it may be better for your budget or current financial situation. The lower sales price can save your savings for an upgrade later in the future, especially if you are just looking for a starting home or looking to get away from renting. There are also lower escrow costs and property taxes to keep some of your money in your bank account versus pouring it all into one property.

Smaller houses are also cheaper to furnish. In terms of utilities, these cost less. Repairs and maintenance are also cheaper because it’s easier to take care of less space -- at least initially. Renovation costs are also cheaper, so you can personalize the space to better suit you.

2. Lower mortgage

A lower mortgage payment every month leads to a better income-to-debt ratio at the end of the month. So, you can save for other things like a newer car or start saving for a bigger house down the line.

3. Cheaper insurance

A smaller house does not have as much to insure in terms of the property itself, leading to lower insurance costs. Lower insurance costs are just other ways to save money for other things. It also helps to get your feet wet in homeownership because insurance might be a new thing to have in terms of bills.

Is having a bigger house worth it?

The ideal house size all depends on you. The amount of space you need for you, your life, and your family is something to consider when looking at bigger houses. Another aspect is your financial capability to afford the costs, expenses, and other things that come with having more space. If the numbers are not in your favor, then there is nothing wrong with starting small.

Are you ready to make the change? Whether you’re upgrading 200 square feet or 2000 square feet, Hero Home Programs wants to help make the transition as easy on you—and your bank account—as possible.

Does a Bigger House Make You Happier? was first published on www.herohomeprograms.com

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