Gift of Equity vs. Sellers Concession

How to Navigate the Best Scenario for Your Home Purchase

 Gift of Equity

A Gift of Equity involves the sale of a residence to a family member, or someone with whom the Seller has a close relationship with at a price that may be below market value.  Essentially, giving the purchaser immediate equity in the property – the difference between the sale price and the market value of the home is the actual gift of equity.  Many lenders allow this as a down payment on the property.  No physical money changes hands on the gift of equity.  The potential pros and cons are listed below:

Pros:

1. Favor to a family member;

2. No real estate commission when selling to family usually;

3. Lower or no down payment to purchaser.

Cons:

1. Impact on home’s cost basis;

2. Legal fees could be extra to draw up contract when not using a realtor;

3. Could trigger gift tax.

For example, a couple may gift up to $30,000.00 and an individual may gift up to $15,000 to another individual, and it may not be subject to a gift tax.  The home’s value can impact the asset’s cost basis for the new homeowner and have capital gains implications for the seller.

The requirements for a Gift of Equity usually require a letter stating the facts of the sale, signed by both seller and purchaser and an appraisal must be done to appraise the value of the property.  There must be clear and concise language that the gift of equity is being given and what the purchase price is.

Sellers Concession

Seller Concession is when the seller pays parts of your closing costs.  As a purchaser you do not receive these funds as cash or a loan, but instead they are a credit at closing against the purchase price.  Average loan costs are from 2% to 5% of the purchase price.  Keep in mind that while a seller concession may provide a short-term answer for a buyer at closing, the buyer is ultimately responsible for a larger loan amount to provide for the purchase price.

For example: House is listed at $350,000.00.  As a potential purchaser, you offer $350,000.00 with $3,000.00 in seller concession, so, your offer is $347,000.00.  If you wanted the seller to receive their list price of $350,000.00 you would have to offer $353,000.00.

Depending on your loan type and down payment, seller concession can be used for expenses that accompany the processing and securing of your loan, including but not limited to:

1. Property taxes;

2. Attorney fees;

3. Appraisal fees;

4. Title insurance;

5. Lender origination fees;

6. Discount points;

7. Credit report fees;

8. Inspections fees.

There are also other bank fees that the seller concession may be used towards.  Whether you get an FHA, VA or Conventional Loan, your mortgage broker or lending institution can explain what seller concession you may ask for during your purchase offer.  Once you roll these costs into your home loan, your monthly payment may be a little higher and the amount of interest you pay over time may increase.  Depending on your financial circumstances, avoiding seller concession might be a better move and coming up with money to cover your closing costs may be the better option.

The way to decide whether a Gift of Equity or Seller Concession is right for you is to speak to you mortgage loan officer or lending institution.  Also, your real estate agent may be a good source of information on whether in today’s market, a seller concession is a good idea.  You should always speak to your attorney, as they can advise you on what may be the better option for your current situation.

 Please contact Trainor Law PLLC if you require legal assistance.

This article is intended to be educational and is not intended to be legal advice, which can only be given after an attorney-client relationship is established.