A Gift of Equity is a transfer of ownership of a property to a family member or someone with whom the seller has had a previous relationship, at a price below or at the current market value. The difference between the actual sales price and what is owed on the home is called the Gift of Equity. Most lenders allow the gift to count as a down payment on the home.
A Gift of Equity requires a gift letter that is signed by both the seller and the buyer. For the purpose of obtaining a mortgage a Gift of Equity is treated as a purchase transaction.
A sales contract will be needed. In the sales contract write down the amount of gift. If the property is worth $200,000.00 and you are selling the property for $150,000.00 the Gift of Equity is for $50,000.00. Include a clause stating: The purchase price is $200,000.00 and the seller will credit the buyer $50,000.00 as a Gift of Equity.
Closing cost can be financed by including a seller's concession into the sales contract: The seller will credit the buyer with up to 6% of the purchase price for closing cost.
The sales contract will need to say, Seller will pay for buyer's closing cost up to 6%. If the sales contract does not say that the seller is paying the closing cost then the buyer will be responsible to pay for the closing cost.
First, you need to get pre-approved. This is an easy step and does not cost you anything.
Also, this step is very important -- as many people search out homes on their own just to find out that the house they found is not in the price range that they qualify for. This approach turns
into disappointment and lost time.
Down Payment - FHA mortgage requirements for a home purchase using a gift of equity requires a minimum of 15% down payment.
According to the new FHA Policy changes, which went effect in early summer of 2010, FHA will require 10% down payment for anyone purchasing with a FICO score lower than 580.
Down payment gift of equity can be gifted from a relative, spouse, or a domestic partner.
Seller's Concessions - FHA mortgage requirements allow for seller concessions of up to 6% of the sales price.
The new FHA Policy changes limit seller concessions to 3% of the sale price. These went into effect in early summer of 2011.
Reserves - FHA does not have any financial reserve requirements on single family homes and duplexes. Three months of reserves are required on 3 to 4 unit family homes.
What documentation will I need?
Today’s historically low interest rates make now the perfect time to purchase a new home.
Equity Down Payment
Generally, a borrower who has made timely payments for the last 12 months serves as a guide and demonstrates their willingness to repay future credit obligations. New FHA Policy changes require minimum FICO score to be 580 for 85% loan-to-value. These FICO requirements went into effect in the spring 2010. However, most individual lenders will still require credit scores higher than 640.
A perfect credit score is not needed for an FHA loan approval. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a for a
conventional loan. Scores down to 500 are accepted if there are compensating factors that offset the credit risk.
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FHA loan requirements new borrowers with less than a 580 credit score will be required to put down at least 10%
FHA requires a minimum credit score of 500 to buy a home or refinance
Chapter 7 Bankruptcy at least two years must have elapsed since the discharge date
Foreclosure must have been resolved for at least 3 years
Government loan: Seasoning is determined by the date the claim was paid
Loans other than Government: Seasoning is determined by the date of sale the lender sold the property
FHA guidelines requires three year past from the date of sale of the property
What documentation will I need?