Introduction
When someone sells a house and wants to help the buyer afford it, they can offer something called a “gift of equity.” This means the seller uses part of their ownership value in the house to help the buyer with the costs. For example, if a parent is selling their house to their child, they might use a gift of equity to make it easier for the child to buy the house.
Gift of Equity
A gift of equity has some rules:
– It can only be used for buying a main home or a second home, not for investment properties.
– The buyer can use this gift to pay for a part or all of the down payment and the costs needed to close the sale, like fees and prepaid expenses. However, it can’t be used as a safety net or financial reserves after buying the house.
Additionally, the same rules that apply to financial gifts from family or friends also apply to gifts of equity. This means the person giving the gift should not gain any benefit from the sale besides helping the buyer, and they should follow the rules about who can give such gifts. For more details, see the sections titled “B3-4.3-04, Personal Gifts.”
Documentation Requirements
When a gift of equity is part of a home purchase, two main documents need to be kept in the loan file:
1. A gift letter that is signed. This is a formal statement that explains the gift of equity, confirming it’s truly a gift and not a loan that needs to be paid back.
2. The settlement statement from the closing of the house sale, which must show the gift of equity.
These documents are important because they prove the gift was part of the agreement between the buyer and the seller.
Recent Related Announcements
The table mentioned is not included here, but it refers to announcements that provide updates or changes related to gifts of equity. For instance, Announcement SEL-2020-06, issued on October 07, 2020, might contain important information for those considering using a gift of equity in their home purchase.
References
For more details, visit Gifts of Equity of the Fannie Mae Selling Guide.