One of the most important aspects of preparing your finances to purchase a new home is deciding how you are going to come up with your initial down payment money. There are several options that can be considered, but one that is often overlooked is the “gift of equity”. A “gift of equity” refers to the gift that is provided by the seller to the buyer of the family. The gift represents a portion of the seller’s equity in the property and is transferred to the buyer as a credit in the transaction. The ”gift of equity” can be a fantastic option for prospective home buyers in Massachusetts.
The gift of equity can be used for both FHA loans and Fannie Mae or Freddie Mac loans, but there are different guidelines for each program that are important to understand.
A Gift of Equity can only be utilized between family members. For the purpose of determining family member eligibility and restrictions, persons with the following relationships to the borrower are considered family members:
- Children, including step children and foster children and children
- Legally adopted children, including children who are placed with the borrower by an authorized agency for legal adoption
- Spouse
- Parents, including step parents and foster parents
- Grandparents, including step grandparents and foster grandparents
- Brothers and sisters, including step brothers and sisters
- Aunts and Uncles
The following are guidelines to remember when utilizing a “gift of equity” for your Massachusetts FHA insured loan
-If the home is not the donor’s primary residence, the loan to value is limited to 85% unless there is documented evidence the borrower leased the property for the past six months
-If the family member is also the non-occupant co-borrower, the loan to value is limited to 75%
-The family member’s proceeds may only be used for the “gift of equity” and payment of closing costs, discount points and pre-paid expenses – The proceeds may not be used to payoff debt on behalf of the borrower, and the borrower may not received cash back at closing
-The sales price for the property is at market rate.
The following are guidelines to remember when utilizing a “gift of equity” for your Massachusetts Fannie Mae or Freddie Mac loan
-A gift of equity is ONLY permitted for principal residence purchase transactions.
-Gifts of Equity are also not allowed by Fannie Mae or Freddie Mac on second homes or investment properties due to Non-arms-length transaction restrictions.
-The sales price for the property is at market rate.
-The acceptable donor and minimum borrower contribution requirements for gifts also applies to gifts of equity. Your lender can o over these with you on an individual basis.
Both the FHA and Fannie/Freddie loans will have some basic required documentation that your lender will review with you including a “Gift Letter” that will need to be signed by both the seller and the buyer.
For more information to understanding acceptable down payment options and gifts please spend some time on the Down Payment Sources section of the Mass Mortgage Buddy site.
This Post is “Mortgage Buddy Approved”
