Because we’ve grown used to living in small spaces together, my husband and I try to avoid giving each other things. Instead, we like to gift each other time together—dinner at a restaurant, a hike in the mountains, or even just time to sit together at home over a bottle of wine and connect. My husband is especially good at these non-material gifts; early every morning he makes a big pot of coffee so that it’s ready when I wake up. He inherited this aptness for generosity through acts of service from his father, who will quietly fix a lightbulb or change the oil in our cars whenever we visit.
Gifts come in all shapes and sizes. When it comes to nontraditional gifts, I recently learned the coolest idea from the Pickett Street team—did you know that family members can give each other the gift of equity? Neither did I. Pickett Street can tell you more about this gift (info@pickettstreet.com or 425-502-5397), and you can also read on for the basic rules.
1. What are gifts of equity?
According to Pickett Street’s preferred mortgage lender Cody Touchette with Caliber Home Loans, “gift funds or a gift of equity is when the seller (a relative) agrees to donate a portion of the equity in the subject property in lieu of all or a portion of the down payment.” In other words, a gift of equity is the sale of a home to a family member or someone with whom the seller has had a previous relationship, at a price below the current market value.
2. Who can receive a gift of equity?
Whether or not you are eligible to receive a gift of equity depends both on your relationship with the seller and on the type of home loan you are using. Here’s the breakdown:
Conventional loans:
For conventional loans, the recipient of a gift of equity must be:
- a relative, such as the borrower’s spouse, child, other dependent, or any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship
- a domestic partner (an unrelated individual who shares a committed relationship with the primary wage earner, currently resides in the same household as the primary wage earner, and intends to occupy the security property with the primary wage earner
- a fiancé
- Someone who is buying a primary residence or a second home (gifts of equity are not permitted for investment property transactions)
When borrowing with conventional loans, a gift or gift of equity from a relative, domestic partner, fiancé, or fiancée must be evidenced by a letter that is signed by the donor. The letter should:
- specify the dollar amount of the gift and the date the funds were transferred
- include the donor’s statement that no repayment is expected
- indicate the donor’s name, address, telephone number, and relationship to the borrower
- be signed by the donor
Finally, when a gift of equity is pooled with the borrower’s funds to make up the required minimum cash down payment, the “gift” letter also should include a certification from a donor who is a relative or domestic partner stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence. The donor should provide appropriate documentation to demonstrate this history of shared residency.
FHA loans:
Gifting equity with an FHA loan involves a similar process, with a few exceptions. First, only family members can provide equity credit as a gift on property sold to other family members. Second, the required gift letter required should follow all standard gift guidelines for FHA Loans.
If all of this sounds like a foreign language to you, get in touch with Pickett Street’s experts at info@pickettstreet.com or 425-502-5397. They can help you better understand how you can give someone you love a comfortable home, which I believe is one of the most amazing gifts of all.