How to keep your family home “in the family”

This blog was written by HUECU mortgage loan originator Helen Laskaris and will focus on when a home is available due to downsizing or the death of a family member.

Downsizing

Typically, this scenario occurs when parents, grandparents, aunts, or uncles move from a larger home to a condominium or smaller home and an adult child, niece, or nephew expresses interest in the original home. Sometimes, it is the family member downsizing who wants to keep the property “in the family.”

It’s possible the transaction occurs as it would from any seller at a market price. More commonly, though, the parent or family member agrees to sell the home at a discount to the relative buyer. This deal could be handled a few ways.

The typical minimum down payment is 3%-5% for a single family home, depending on the price of the property and whether the buyer is a First Time Homebuyer. Closing costs and reserves (assets remaining after closing) are required in addition to the down payment.

An appraisal is conducted as part of the lender process, and in the case of a “family discount”, the appraised value will certainly be higher than the purchase price. The lender, however, will base the transaction on the lower of the two values. If the down payment is under 20%, the borrower will need private mortgage insurance (PMI), which requires an additional monthly payment.

Example

Consider a property appraises at $700,000, but the family member is willing to accept $500,000 from the purchasing relative. The minimum down payment would be $15,000-$25,000 (3%-5% of sale price), plus closing costs and reserves. A private mortgage insurance payment would apply.

Another way to handle the transaction is to have the purchase price be the market price. Then, the discounted amount could be in the form of a “gift of equity.”

A “gift of equity” refers to a gift provided by the seller of a property to the buyer. The gift represents a portion of the seller’s equity in the property transferred to the buyer as a credit in the transaction. A gift can be provided by:

• a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
• a non-relative that shares a familial relationship with the borrower defined as a domestic partner (or relative of the domestic partner), individual engaged to marry the borrower, former relative, or godparent.

A gift of equity:

• is permitted for principal residence and second-home purchase transactions;
• can be used to fund all or part of the down payment and closing costs, including prepaid items; and
• cannot be used towards financial reserves.

This option requires a gift letter as part of the transaction documentation. The donor granting the gift should consult their tax advisor about any potential implications.

Example

Suppose the sale price and appraised value are $700,000 with a gift of equity of $200,000 and a mortgage of $500,000. The gift of equity represents a 28% down payment. As a result, the mortgage would be $500,000 without any PMI payment. Closing costs and reserves would still apply, and closing costs can be part of the gift of equity.

Again, the donor should consult their tax professional about the gift’s tax implications.

Death

When a home-owning parent or relative passes away, the beneficiaries of their estate will inherit the property. The property’s title would change to the name of the parties as designated in the will or trust. This could involve probate and take several months to complete following the death of the original owner. It is important to keep all expenses for the property current during the time period while the affairs of the deceased are being finalized.

If one party wants to retain the property (this can only happen once the property is retitled in the name of the heirs), they can “buy out” the other owners via a cash-out refinance. In these situations, the property value will usually be the market price as determined by an independent appraiser engaged by your lender during the loan process. If there is a mortgage, it would have to be paid off at the time of the refinance. There is a maximum cash out amount allowed on a primary residence of 80% of the appraised value.

The new owner will have to go through the mortgage qualification process with the new monthly payment in addition to their current obligations if they have other debts besides the housing payment on the subject property.

Contact Your Loan Officer

Many people consider the possibility of retaining a family home following the downsizing or death of a family member. In this super competitive housing market the purchase of a family home is a great opportunity to become a homeowner without a bidding war! It’s important to remember that each situation of purchasing or refinancing a home to “keep it in the family” has unique elements. The best thing to do is contact your loan officer as soon as you find yourself in a situation like this.” An MLO will help you make the securest and most financially beneficial decision.