How to Purchase a Home Using a Gift of Equity Letter

Recently my husband and I purchased his parents' home. One thing that allowed us to afford the home was that his parents gave us a gift of equity in the home. This can be done by almost anyone who wishes to give their children a discount on their home.

Things You'll Need

• Gift of equity letter
• Lender

Instructions

1. Negotiate with the seller on how big of a gift equity they are willing to give. Get this in writing before buying the home.

2. If there is going to be a loan on the home, then you should ask the lender for a sample gift of equity letter and fill it out. The details include the person doing the gift, the amount, and the persons receiving the gift. The gift of equity could be any amount, but the lender will need it in the loan file.

3. If there is going to be no loan and the sellers are just selling the home at a great discount to the buyers, then the difference between the sale price and the market price would be considered the gift of equity. This number should be recorded. Basically the sellers or buyers should still get a professional appraisal to get the market price.

4. Any gift of equity above the annual gift tax exemption limit should be reported to the IRS. See the post Gift Tax 101 in the resources to see a run down on gift taxes. Basically as long as the gift is under the life time exemption of $1 million the giver does not have to pay taxes.

5. For investment properties the buyers need to put down at least 20% before a lender will accept any gift funds.

Resources

• Gift Tax 101