I Just Want To Sell My House

September 23, 2012 9:19 AM

What are the U.S. mortgage regulations on giving a gift of equity to a non-relative?

Everything I've been able to find is old, but I've read that the family member restriction was lifted in 2007. I own a house that I currently have 40% equity in, and folks lined up who would like to buy it. I honestly don't care if I make a red cent on the sale of this house, I just want the note paid off and to be able to walk away for reasons that I'd prefer not to go into here. I would gladly gift the buyers part or all of my equity, and pay the taxes on it, in order to just move on (which is why equity gifting is more appealing to me than a land contract). I've talked to several mortgage agents, all of whom are apparently and sadly clueless. Has anyone done this, or happen to know the rules.

posted by Athene to work & money (14 answers total)

Could you just lower the price of your house to the amount you owe?
posted by Sweetie Darling at 9:33 AM on September 23, 2012 [1 favorite]

Sell it at the best possible market price; donate proceeds to your favorite charity. Any taxable capital gains should be offset by the charitable-giving deduction.
posted by fatllama at 9:42 AM on September 23, 2012

The idea here is to minimize the necessary down payment for the buyers. Their credit is over 750, their income qualifies them for a mortgage, and they are in the bag, so I wouldn't have to hire an agent or deal with the pain of selling a house on the open market. They just don't have much to put toward a down payment. Again, I'm not worried about the tax consequences- I have an excellent accountant and have gone over this with her with actual numbers, and even the worst case scenario is no big deal.
posted by Athene at 9:48 AM on September 23, 2012

A buyer lined up to buy it who don't have a down payment or can't otherwise qualify for financing, right? Otherwise you can do what Sweetie Darling suggests, just sell it at a low price and your buyer has instant equity.

I've not done this, and I'm not a mortgage broker or a banker. If you only spoke to independent mortgage agents -- as opposed to someone at your own bank -- you are not necessarily dealing with the sharpest (or most ethical) tools in the shed. They just want to write mortgages for the largest amount they can get away with. They probably haven't seen something like this for a non-relative situation, if they have ever seen it at all.

My hunch is that your bank -- or the other lender that would be providing the financing to the buyers -- would be extremely skeptical of this. If they are not relatives of yours, why would you want to give them so much money? The thinking might be that the house is not really worth as much as you say it is, and you're looking for a quick sale to avoid some problem that the bank doesn't know about yet.

If your buyers are so credit-worthy, can't they do an FHA loan? First-time homebuyer programs in your state or municipality? Have they done their own shopping around for mortgages?
posted by stowaway at 9:56 AM on September 23, 2012

Have you looked into whether or not you have an assumable mortgage (and if not, would the bank convert it for a fee)? That takes care of every aspect of your situation in one stroke - The transfer of equity, the lack of a down payment, makes any capital gains implications a moot point, and gets you out of the mortgage, all nice and tidy.
posted by pla at 9:56 AM on September 23, 2012 [1 favorite]

Gift of equity from a non-family member is definitely not permitted if your buyers are getting FHA financing, and I'm about 99% sure conventional (non-FHA) financing does not allow it either (the restriction was issued, not lifted, in 2007).

If you want to sell to these folks, the best option is to lower your sales price to the point that they can come up with the down payment (3.5% of sales price for FHA), and pay all their closing costs.
posted by tinymojo at 9:57 AM on September 23, 2012 [1 favorite]

They don't qualify for FHA financing- I'm not sure why, but I presume it has something to do with them not being first time homebuyers. No, my mortgage is not assumable. Their credit is fine, and they could get a mortgage but for the 20% down payment.

Part of the reason that I don't have a problem gifting them equity is because my house was appraised in '08, and again this year, and I feel as though it was and is wildly overvalued. Real estate agents have confirmed this. Houses are a dime a dozen here- in my town of 6000 people, there are nearly 2000 houses currently for sale. Why the open market and the appraised values don't jibe, I cannot say.
posted by Athene at 10:24 AM on September 23, 2012

I believe that rent-to-own means they would pay you rent for a set number of months and a portion of their rent would then convert to a down payment. Would you be interested in something like that?
posted by the young rope-rider at 10:46 AM on September 23, 2012

Hmm. There are other options besides FHA loans for buyers who have less than 20% available for a down payment. Why do these buyers want to buy your house over all the other homes for sale? (2000 single family homes in a 6000 person town? What ...? That sort of supports my point of why banks would look askance at a transaction like this -- you know something about the market that is not reflected on paper.)

Who appraised your house? Was that for property taxes? That may be a very different number from what a bank appraisal will give you. So the whole thing could fall apart when the loan is being underwritten for your buyers anyway.

If you are willing to give up equity, have you thought of selling it on the open market for a price that is much lower than other, similar houses? For an amount that would cover the commissions and transfer taxes? That may give you an edge over other homes.
posted by stowaway at 10:59 AM on September 23, 2012 [1 favorite]

What you are proposing is a way to get around the rule that most responsible home lenders follow: they will only lend 80% of the purchase price, or 80% of the value, whichever is less. Most of them require that the borrower have the other 20% in cash. They will not make the loan if the borrowers have borrowed the other 20%, or agree to pay the other 20% to the seller over time.
posted by megatherium at 11:40 AM on September 23, 2012

If I gave a seller a gift of my entire amount of equity, the bank would be writing a loan for 60% of the appraised value of the home, so even less than the typical 80% rule. This is not a work around, it's money in the form of equity rather than cash. Obviously, I'm not going to do anything illegal or even unethical. I'm just looking for particulars.
posted by Athene at 12:02 PM on September 23, 2012

Ah, your loan is not assumable. That's the key. You'll only be able to see your equity as liquid and transferable after the sale.

The only way I can see doing this is as transferring the note or loan to them, but that seems impossible.

I'll ask around.
posted by snsranch at 5:04 PM on September 23, 2012

FHA is not limited to first-time buyers. I know my way around FHA pretty well and it seems unusual in the extreme to me that someone with stable income and 750 credit scores doesn't qualify. And if they don't qualify for FHA, they're not likely to qualify for anything else on the market.

If I gave a seller a gift of my entire amount of equity, the bank would be writing a loan for 60% of the appraised value of the home

The bank is going to be highly skeptical of the appraised value, for the simple reason that most people do not give away a giant chuck of equity to perfect strangers for no benefit. That's one of the reasons gift of equity is limited to family members; that's about the only scenario where it really makes sense. Between other parties, the bank is going to assume that something is going on that has not been disclosed to them.

Unfortunately, unless these folks can work it out with FHA, you're going to have a tough time making this work. I hear you that you aren't up for land contract, rent to own, or selling on the open market, but those really are your best options.
posted by tinymojo at 5:58 PM on September 23, 2012 [1 favorite]

One more option I came across, thinking about this one today...

You mentioned you live in a town of only 6000. The USDA offers 0% down "rural housing" mortgages, based primarily on living in the middle of nowhere. Would your buyers possible qualify for that?
posted by pla at 6:27 PM on September 24, 2012