There are a lot of gray areas that make buying & selling real estate confusing. What if you’re selling your home to one of your own children or another relative and don’t want them to have to pay a bunch of fees and down payments? Maybe you don’t even want to profit off the sale at all… you just want them to be able to cover the remainder of the mortgage. Depending on the situation, using a gift of equity may be a better option to help make the sale happen.
What Is a Gift of Equity?
Paying your mortgage, reduces the amount that’s owed against your while the value of the property remains the same. The higher the value is, in comparison to what’s still owed against it, the more equity the home has. You’ve probably heard about equity-based loans or other ways to use equity as a form of security, and they all come down to the concept that your home is worth more than what’s actually owed to pay off the remainder of its mortgage.
If you’re selling to a family member, you may be able to use this equity to their advantage. A “gift of equity” is the practice of using the property’s equity as a down payment for someone wanting to buy the property. This not only saves your family member money but may also qualify them for a better loan or lower interest rate if they’re borrowing to pay the remaining difference.
Selling Your Home
The first step is to determine the actual value of the property. This has to be a fair market appraisal, and if there’s a lender involved, then they may wish to choose the appraiser. You will also need to document any details relevant to the gift of equity, such as establishing a relationship, providing proof of residency (as well as any rental terms, if they apply) if the buyer already lives on the property and any additional details that are relevant to proving that both of you have a qualifying relationship and that you wish to make the gift of equity.
There are also issues such as closing costs and escrow fees that may have to be taken into account. In most cases, though, these can be covered by seller concessions (where you agree to absorb the costs by taking less of the sale price for yourself) as you are allowed concessions of up to 6 percent of the sale value in most cases. You will also need to draft a gift letter for use by both the lender and the IRS, which as you might guess, means you also have to pay taxes on the value of the gift.
Is It Actually Allowed?
In most cases, there is nothing preventing you from selling your home using a gift of equity so long as the buyer is a spouse, child. dependent or other individual with an established blood or legal relation to the seller. This includes both blood relatives and those who are adopted or placed under legal guardianship of the seller. Fiancés and domestic partners can typically qualify as well, so long as it’s allowed by the jurisdiction in which you live. Friends, non-related roommates and other unrelated buyers do not qualify.
Please remember the rules will vary, when using this process, depending on where you live and the equity gifting program you use. There can actually be some pretty significant differences from one program to the next, so you definitely shouldn’t rush into selling with a gift of equity until you’ve done some research to see what the best way to do it in your state is. With that said, if you do your due diligence, this can be a good way to pass on property to a loved one, provided you avoid the potential pitfalls.
Ready to Sell?
Just because using a gift of equity to sell your home can be tricky doesn’t mean it has to be. Nor do you have to do it alone. A smart idea would be to use a seasoned real estate professional to guide you through the process every step of the way to ensure that you get the best possible experience. The smart choice is Scott Stephens!