Gift of Equity Mortgage Guidelines: Buying a Home from Family in 2024
If you’re considering buying a home from a family member, the gift of equity mortgage might be the perfect way to make it happen without needing a big down payment.
It’s a great option for those looking to keep homeownership in the family while avoiding the typical upfront costs of buying a house.
But what exactly is a gift of equity, and how can it benefit both the buyer and seller? In this updated guide for 2024, we’ll break down the gift of equity mortgage guidelines into simple terms you can understand. Whether you’re purchasing or refinancing a home, we’ll cover all the basics, including the process, requirements, and how to get started.
A gift of equity happens when a homeowner sells their property to a family member at a price below its market value. The difference between the market value and the discounted sale price is called the “gift of equity.” The buyer can use this gift as a down payment or to cover closing costs.
For example, if your parents sell you their home for $250,000, but the house is worth $300,000, that $50,000 difference is the gift of equity. You can use it just like you would use cash for your down payment, helping you avoid the need to come up with a lot of money out of pocket.
How Does a Gift of Equity Mortgage Work?
The gift of equity mortgage process works much like a regular mortgage but with some extra paperwork to prove that the equity is a gift. There are some key steps involved:
Appraisal: The home must be appraised to determine its current market value. This ensures that the gift of equity is accurate.
Gift Letter: The seller (your family member) must sign a gift letter that states the amount of equity being gifted to you. The letter must clarify that the money is a gift, not a loan.
Loan Application: You’ll go through the regular mortgage application process, including providing proof of income, assets, and other financial information.
Closing Costs: You can request the seller provide concessions to help cover closing costs. This amount can also be included in the gift of equity.
Click Here to Buy a Property from a Family Members as Gift of Equity
2024 Updates to Gift of Equity Mortgage Guidelines
As the real estate market develops, it’s important to be aware of some fresh changes for 2024:
Stricter Appraisal Requirements: Mortgage lenders have become stricter about appraisals. The house must appraise at or above the agreed-upon sales price to ensure real equity. If the appraisal comes in lower, the gift of equity may need to be reduced.
Increased Seller Concessions: For FHA loans, seller concessions have increased to 6% of the sales price, and for VA loans, it’s up to 4%. This helps buyers cover more closing costs without dipping into their own pockets.
No Lender Overlays: Non-QM lenders, like Non-QM Mortgage Lenders, do not apply additional requirements (called lender overlays) to the loan, making it easier to get approved for a gift of equity mortgage.
Who Can Gift Equity?
Not just anyone can gift you equity. According to the 2024 gift of equity mortgage guidelines, only family members can provide this gift. Eligible family members include:
Parents
Children
Siblings
Grandparents
In-laws
Fiancés or domestic partners (in some cases)
The key is that the person gifting the equity must have a close personal or familial relationship with you.
Steps for Buying a Home with a Gift of Equity
If you’re ready to purchase a home using a gift of equity, here are the steps to get you through the process:
Agree on a Sale Price: Work with your family members to agree on a fair sale price that is below the market value.
Get the Home Appraised: An appraisal will determine the home’s actual value. The difference between the sale price and the appraised value is your gift of equity.
Request a Gift Letter: The seller (your family member) must sign a gift letter stating that the equity is a gift, not a loan. Many lenders offer a template for a gift letter that you can utilize.
Apply for a Mortgage: Apply for a mortgage with a lender who accepts the gift of equity transactions, such as Non-QM Mortgage Lenders. Make sure you submit all necessary documentation, including income verification, rental history (if applicable), and proof of assets.
Cover Closing Costs: Work with your lender to see if the seller can contribute to your closing costs through seller concessions. This helps you save even more on out-of-pocket expenses.
Complete the Sale: Once the lender approves your loan, you’ll close on the house just like any other real estate transaction. The difference is you’ll have used the gift of equity for your down payment.
How Does Seller Concession Work with a Gift of Equity?
If you’re worried about closing costs, seller concessions can be a great way to save even more money. Seller concessions allow the seller to cover a portion of your closing costs. In 2024, the guidelines allow up to:
6% of the purchase price for FHA loans
4% for VA loans
3% for conventional loans
In a gift of equity transaction, you can combine seller concessions with the equity gift. For example, suppose your parents are gifting you $50,000 in equity. If that’s the situation, they have the option to include an additional $5,000 in seller concessions to address your closing expenses, further reducing the cost of the purchase.
Gift of Equity Example: How It Works in Real Life
Let’s examine an example closer to explain how the gift of equity works in practice.
Scenario: Bob has been renting his parents’ house for three years and is now ready to buy it. The home is appraised at $300,000, but Bob’s parents are willing to sell it to him for $250,000, giving him a $50,000 gift of equity.
Bob’s parents also agree to cover $5,000 of his closing costs through seller concessions. That means Bob can use the $50,000 gift of equity as his down payment and the $5,000 to cover his closing costs, resulting in a near zero out-of-pocket purchase.
Documentation Needed for a Gift of Equity Mortgage
Like any mortgage, you’ll need documentation to qualify for a gift of equity mortgage. Here’s what you’ll need to gather:
Gift of Equity Letter: Signed by the seller, stating the equity is a gift.
Appraisal Report: Displaying the present market worth of the residence.
Proof of Income: Pay stubs, tax returns, and W-2s or 1099s.
Proof of Assets: Bank statements or other asset documentation.
Rental History: If you’ve been renting the home from the seller, proof of on-time rental payments helps strengthen your mortgage application.
Why Choose a Gift of Equity Mortgage?
There are several benefits to using a gift of equity mortgage when purchasing a home from a family member:
Lower Out-of-Pocket Costs: You can use the gifted equity instead of a down payment, potentially reducing or eliminating the need for cash upfront.
No Lender Overlays: Many non-QM mortgage lenders don’t have extra requirements (overlays), making it easier to qualify for a loan.
Seller Concessions: The seller can help you cover closing costs, making the transaction even more affordable.
Family Wealth Retention: The home stays in the family, and you get the satisfaction of purchasing a property you may already have sentimental ties to.
Common Mistakes to Avoid in Gift of Equity Transactions
Although obtaining a gift of equity mortgage can be quite simple, certain errors are frequently made and could potentially hinder or add complexity to your home-buying process. Keep an eye out for the following:
Not Getting a Proper Appraisal: The appraisal determines the value of the gift. If the house doesn’t appraise for the expected amount, the gift of equity could be reduced.
Confusing Loans with Gifts: The gift of equity must be exactly that—a gift. It cannot be repaid like a loan; the gift letter must clearly state this.
Not Considering Seller Concessions: Always check with the seller to see if they are willing to help with closing costs. This could save you thousands of dollars.
Missing Documentation: Ensure that all documentation, including the gift letter and proof of income, is promptly submitted to prevent any potential last-minute complications with the lender.
Final Thoughts on Gift of Equity Mortgage Guidelines in 2024
Buying a home with a gift of equity is an excellent way to make homeownership more affordable, especially when purchasing from a family member. The process is simpler than it seems, and with the help of the right lender, you can quickly navigate through the requirements.
In 2024, with stricter appraisal guidelines and no lender overlays, it’s easier than ever to take advantage of a family member’s willingness to gift equity.
