Some young, first time, homebuyers have been fortunate to have family members assist them with a down payment to purchase a home. Savings, checking, stocks and mutual funds are different forms of assets. Many people don’t know that when they purchase a home from a relative, there is a guideline that allows for the equity in the home to be used as an asset and therefore, a down payment. There are two different ways this is done.
Buying from the owner occupied relative (FHA guideline)–
If you are purchasing a home from a relative that lives in the subject property, you can get financing of up to 96.5% of the sales price. Therefore, as long as there’s 3.5% equity, you can buy this property with no money out of pocket.
Buying from the non-owner occupied relative (FHA guideline)–
If you are purchasing a home from a relative who does not live in the subject property (ie, rental property) the maximum financing on that transaction would be 85%, so there would need to be 15% equity in the property to be able to purchase this with no money out of pocket.
For conventional financing, any gift of equity that is less than 20% would require the borrower to invest 5% of their own funds. A 20% gift of equity would require no out of pocket investment towards the down payment.
So when purchasing a home from a relative, investigate these options before finalizing the transaction.
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