Question:

How does gift of equity mortgage work?

Answer:

A gift of equity mortgage allows you to purchase real estate for below market price. The difference will be accepted by the lender as a down payment. This is usually done between family members.

If a seller is offering you the house at below official sale price this may not be legal. Gift of Equity home loans are usually not allowed by the lender if the donor and recipient are not related.

However, seller's downpayment assistance is allowed and is official through many local, state or government down payment assistance (DPA) programs. Run a web search to locate one appropriate for you.

Tax Issues with Gift of Equity Mortgage Loans

Firstly, gift recipients do not pay taxes on the gift amount. Secondly, your parents could make a gift of around $12,000 per year to each of your family members, which is considered non-taxable gift. See IRS Publication 950 about estate and gift taxes and use certified accountant's services.

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