WHAT IS GIFT EQUITY

When a seller sells off property at a price below the market value, the difference between the market value and the sale price is considered as a gift from the seller to the buyer. Usually gift occurs between family members.

When there is a mortgage transaction involved with the buying process, the lender considers the gift as a down payment.

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Usually this means the seller is willing to 'gift' the equity over 'sales price' to the buyer. The lender will use this 'gift' as down payment money for the buyer.

Example:

Mom and Dad own home valued at $150k. Selling home to child for $100k on written contract. Mom and Dad are 'gifting' $50k to the child. Home appraisal comes in at $150k.

Buyer (Child) obtains loan for $100k. The Loan To Value is 67%. The child obtains low rate due to the low risk for the lender. House is worth more than the loan.

Its a great deal if the seller is willing to overlook the 'loss' of $50k income.

Gift of equity is also applicable in case of property transfer from one individual to another without any monetary compensation or at a price lower than the value of the property.

Transfer of property through quitclaim or any other deed without any money transfer is taken as gift. The transferor has to pay taxes on the value of the gift exceeding the first $12000 of the gift (or property) value.

You may refer to a previous discussion where the community has discussed on Gift of Equity.