Monday, February 4, 2013

How to define Gift and Gift of Equity

How to define Gift and Gift of Equity

Posted on January 18th, 2013 by Hina Habib



Gift assets are often used in mortgage transactions especially when people are buying their primary houses. This asset is used in combination with the borrower’s own assets. Requirement of gift funds arise when a borrower does not have enough funds of his own. Gift funds are only accepted if they are coming from allowable sources, mentioned in underwriting guidelines. The person who gives the gift is called a DONOR. The reason for this name is due to the fact that when anybody gives a gift fund towards the purchase of a property, they cannot claim this money back. Therefore, the definition of a Donor is a person donating his/her money to a borrower without any recourse of these funds.

Gift funds are acceptable assets and can be used in both government and conventional loans. People buying investment properties are not allowed to use gift funds except in some cases. Gift funds can also be used to buy a second home. Gift funds cannot be used in refinances, except again in some unique situations. Giving or receiving gift funds is acceptable in underwriting and has provided relief to borrowers as well as increased purchasing power for a home buyer.
So far we have covered information relating to gift funds and now we will be discussing Gift of Equity, which is a different kind of asset being used in purchase transactions. This asset is rarely used and it is used in situations where one relative is selling a property to another relative.
Gift of equity is defined as a sale of a home, made to a family member or someone who has a previous relationship with the seller, at a price below the current market value. The difference between the actual sales price and market value of the home is known as gift of equity. The most common example of this type of transaction is a son selling a property to his father or a father selling a property to his son.

Gift of equity is an asset which merely depends on the equity of the property. As I mentioned earlier, the gift of equity is given by a seller at closing. This type of gift is allowed on both conventional and government loan programs, with some changes exercised by different lenders according to their guidelines. An example is the possibility of one lender allowing gift of equity with a minimum credit score of 620 and for another lender this limit is 640.
It can be used towards the down payment of the house and the buyer gets the house without investing a lot of funds. In the present market we do not come across this kind of transaction due to the declining market situation. This program has allowed many buyers the opportunity of becoming homeowners without having to wait a long time to save in order to buy a home.

SOURCE: Published by NAMU® Publishing Group, a division of the National Association of Mortgage Underwriters (NAMU) (http://www.mortgage-underwriters.org


Joel Lobb (NMLS#57916)Senior  Loan Officer
502-905-3708 cell
502-813-2795 fax
jlobb@keyfinllc.com

Key Financial Mortgage Co. (NMLS #1800)*
107 South Hurstbourne Parkway*
Louisville, KY 40222*




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