Homeownership is one of the most common ways that individuals can achieve generational wealth. But did you know that there’s a way to pass down that equity from generation to generation?
It’s easier than you’d think thanks to a gift of equity.
What is a Gift of Equity?
Before we dive into the benefits of a gift of equity, let’s define it first. A gift of equity is when the home seller agrees on a price significantly lower than the home’s appraised value. The difference between the appraised value of the home and the sale price is considered the gift.
These transactions typically occur when the seller and buyer share a close personal connection, most commonly between family members.
Buyer Benefits of a Gift of Equity
So, now that you know what it is, let’s break down how they work.
One of the biggest barriers of entry to homeownership for first-time buyers are cash savings to cover a down payment. When the home sells for a price lower than its appraised value, that leaves leftover equity in the home which is most commonly used as the buyer’s down payment.
For example, if the home is worth $500,000 but is sold for $400,000, this creates a $100,000 gift of equity. The $100,000 would then equate to a 20% down payment on the home. It’s important to note that a 20% down payment is not required. If the gifted equity plus your savings doesn’t quite add up to 20%, there are plenty of loan products which allow a lower down payment or a few down payment assistance programs that you may qualify for in your area.
How to Qualify for a Gift of Equity
There are a few requirements to qualify, and they vary based on the type of loan that the buyer will receive. For FHA loans, the Federal Housing Administration stipulates that only family members can provide equity credit as a gift on property being sold to other family members.
Government-backed loans are typically stricter regarding loan guidelines than other lenders and loan programs. Fannie Mae specifies that a gift of equity can only occur between the borrower’s spouse, child, or other dependents, a domestic partner (such as a fiancé), or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship.
To be eligible for a gift of equity, both the buyer and seller must meet the lender’s requirements. If you’d like to learn more about specific lender requirements or which lender/loan product might work best for you, contact a member of my team and we’ll be sure to give you personalized advice catered to your unique situation.