Posted on: 05th Jan, 2011 11:02 am
My husband and I will be buying his Grandmother's house which is currently owned by her children, (Husband's mother, Aunt and Uncle.) They are going to sell us the house for $90,000, the house was currently appraised for $140,000. If they were to give us a gift equity, how would that work? Can we go forward with the sale of $90,000 with them giving us a gift equity of $10,000 each (under the gift tax exemption) so we would then get a mortgage for the $60,000?
Hi Cjacton2,
The way this is normally done is to set the sales price at the appraised value of $140,000.00 while you take out a loan for just the amount the sellers want which in your case is $90,000.00.
In this case the gift of equity is the difference between $140,000 and $90,000 for a total gift of equity of $50,000.00.
Here is how this benefits you. That gift of equity is treated the same way as if you were actually putting $50,000 cash down which means better rates and a better chance of getting your loan approved.
If you're doing a conventional mortgage it also means that you will not be subject to paying private monthly mortgage insurance.
If you do an FHA loan you'll have mortgage insurance unless you take out a 15 year mortgage.
The way this is normally done is to set the sales price at the appraised value of $140,000.00 while you take out a loan for just the amount the sellers want which in your case is $90,000.00.
In this case the gift of equity is the difference between $140,000 and $90,000 for a total gift of equity of $50,000.00.
Here is how this benefits you. That gift of equity is treated the same way as if you were actually putting $50,000 cash down which means better rates and a better chance of getting your loan approved.
If you're doing a conventional mortgage it also means that you will not be subject to paying private monthly mortgage insurance.
If you do an FHA loan you'll have mortgage insurance unless you take out a 15 year mortgage.
Okay, but the $50,000 is over the gift tax exemption. This would be a second home for us so it would have to be an investment loan or vacation home loan. We also do not want to get a mortgage for the full amount of $90,000.
We were also wondering would we be able to then put the house in trust of our children?
We were also wondering would we be able to then put the house in trust of our children?
Because you will be purchasing this home as a second home or investment property you will be using conventional financing. For investment properties gifts are not allowed.
Your best bet is to speak with a local lender to get the details on how to make this best work for you.
How you take title is different than who will be responsible for repayment of the loan. An attorney is your best bet here.
Your best bet is to speak with a local lender to get the details on how to make this best work for you.
How you take title is different than who will be responsible for repayment of the loan. An attorney is your best bet here.
Big fat disclaimer: Talk to an estate planner. Don't make any decisions from this.
Gift is $13k now, per donor, per donee. Example, Mom can give son and wife $26k per year that adds towards the lifetime exclusion. Plus aunt, plus uncle, etc. You can qualify the whole gift probably (see disclaimer).
You really should talk to an estate planner. The pro's/con's of a trust are big, but then you have issues of revocable/irrevocable, retention of beneficial interest. There are some ways to basically make the entire trust not worth the time, effort, or expense of establishing.
From a mortgage perspective, this isn't that complicated. It's either a second home or investment property. If you are talking about your own estate planning, I'm guessing there are assets/reserves already in your accounts. If so, the mechanics of the gift are not that tough. Just define the occupancy type (2nd home / investment) and keep your loan officer / estate planner on the same page.
Gift is $13k now, per donor, per donee. Example, Mom can give son and wife $26k per year that adds towards the lifetime exclusion. Plus aunt, plus uncle, etc. You can qualify the whole gift probably (see disclaimer).
You really should talk to an estate planner. The pro's/con's of a trust are big, but then you have issues of revocable/irrevocable, retention of beneficial interest. There are some ways to basically make the entire trust not worth the time, effort, or expense of establishing.
From a mortgage perspective, this isn't that complicated. It's either a second home or investment property. If you are talking about your own estate planning, I'm guessing there are assets/reserves already in your accounts. If so, the mechanics of the gift are not that tough. Just define the occupancy type (2nd home / investment) and keep your loan officer / estate planner on the same page.