The Zero Down Payment Option for Family Members
If you ever thought about purchasing a home as your primary residence from your parents or grandparents, cousins or in-laws, did you know that they could sell you the property for less than its Fair Market Value?
If you own a home, did you ever wish you could sell it to a family member and help them buy it? Even if you don’t personally have a lot of resources?
There is a little known method to accomplish these objectives which in the Lending World it is called “Gift of Equity.”
Equity is the difference between Fair Market Value and what you owe. For example, the fair market value of a home is $780,000 and you have a loan with a balance of $300,000. In real estate lingo, the difference between $780,000 - $300,000 = $480,000 is your equity in the home.
You can give away this equity to a family member!
For you, this means you can help a family member buy a home with something other than money. For the family members receiving this Gift of Equity means that they can use it as their downpayment on a mortgage to buy the home.
The bank will ask for an appraisal of the property to determine the Fair Market Value and you, as the Seller, can sell for ANY amount lower than Fair Market Value to your family member!
What if you would like to give it all? All of the equity? Theoretically you could!
Wat if you only want to give your relative 20% so he/she does not need to pay for Mortgage Insurance? You can!
What if you only want to help them with 10%, and they need to come up with the rest of the down payment? You can do that too!
This method is extremely flexible.
This works for primary residences (your main home where you live) and also, some lenders are willing to do this for second homes (less common).
This is a wonderful way to keep the property within the family while at the same time helping another family member start in life.
What about gift taxes? This is beyond the scope of this short article, but for most people, it should not make a big difference. In 2021, an individual’s combined lifetime exemption from federal gift or estate taxes is $11.7 million. If married, the joint exemption is $23.4 million. (Of course we also advise that you check with your accountant for tax advice.)
For the family member receiving the Gift of Equity, financing works in the same way as if they were putting the down payment themselves, except it comes from the Gift of Equity. All that is required is that the Seller writes a letter containing certain elements and an appraisal to determine Fair Market Value.
We can work with the buyer to determine what payments he or she can afford, and working backwards, calculate what he can pay! Then you, the seller, price your home at what your family member can afford and voila, he is the proud home owner and the home remains in the family! This can be a helpful tool for parents or other relatives who want to give their family member a good start in life in these economically challenging times.
Please contact me if you would like more information.
