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My parents want me to purchase their home located in Sacramento County, California. I am fortunate enough to be living in the home and not paying any rent. The home itself is paid off. I've been researching the best approach to purchase the house from them as cheaply as possible, but I can't seem to find a definitive answer. I am also a first time home buyer (if that gives me any other perks)

I called a lender and found that my parents cannot gift me any money for a down payment. The down payment would need to come from my own funds which would then prevent me from putting 20% down. Aside from that, the research I've done so far has given me these steps.

1. Find out Fair market value of house through an appraisal - parents want to sell to me as cheaply as possible. I don't know at what point it becomes a gift with the IRS as well as any other ramifications that selling a house under market value would have. Someone told me that 15-10% undermarket value is reasonable enough to not raise any red flags with the IRS.

2. Get loan

3. Draw up a purchase contract for the house "as is"

4. Go through a title company to finalize sale. (I honestly don't know if this is needed or of there is some other means to just simply document the sale and transfer ownership of property along with funds)

Any clarification would be much appreciated. As well as alternative routes. The key is not to make money for my parents, but to make the cost as low as possible. Like I said before, my parents would just give me the house if it were possible and had no penalties associated with that action.

smithsussane · Posted: Wed Aug 04, 2010 9:31 pm Post subject:

Hi ashin!

Welcome to forums!

You parents can just transfer the property as a gift to you. However, in that case, they would be responsible for paying the gift taxes.

You can apply for a FHA loan in order to buy the property. In that case, you will have to pay a down payment of 3.5% - 5%. You will have to appraise the property in order to find out the value. Depending upon that value, you can apply for a pre-approval and then get the loan. At the closing you will have to pay the required dues and sign the documents. You can contact a real estate agent and he'll help you understand the whole process.

Feel free to ask if you've further queries.

Sussane

tfaulhaber1 · Posted: Thu Aug 05, 2010 11:36 am Post subject:

Your parents can give you a gift of equity for your down payment and a sellers concession to cover closing costs. You will be probably be required to show 2 months reserves in the bank. Also, you will have to be able to carry the new mortgage by yourself.

Guest

That's exaclty what I was looking for tfaulhaber1. Gift of equity is probably what I'm going to do now that i know the proper terminology. So the lender rep on the phone was incorrect in telling me that I would not be able to receive a gift from my parents as a down payment. Well the lender probably was correct regarding the "cash" part, but that's just technicallities since a gift of equity would be essentially the same thing in this scenario.

So I assume that the combined gift of equity and sellers concession cannot exceed the annual gifting amount for married couples of $26,000. If it does then they would have to file for Gift tax.

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