When it comes to purchasing a home, there are multiple ways to finance the transaction. One option that some homebuyers may consider is utilizing a gift of equity. In short, a gift of equity is when the seller of the house gifts part of the equity in their home to the buyer, which is then used as the down payment on the purchase. However, it is important to ensure that this gift is properly documented in the purchase agreement. Here are the steps you can take to include a gift of equity in a purchase agreement.

Step 1: Discuss the Gift of Equity with the Seller

Before you proceed with documenting the gift of equity, it is important to ensure that both parties understand the agreement. In some cases, the seller may be unfamiliar with this type of transaction. Therefore, it is important to discuss the gift of equity with the seller and explain the process. This will help to ensure that the seller understands the agreement and can provide their consent.

Step 2: Determine the Value of the Gift

Once the seller is on board with the gift of equity, you will need to determine the value of the gift. This can be done by obtaining an appraisal of the property. The value of the gift will be the difference between the appraised value and the purchase price. For example, if the appraised value of the house is $250,000 and the purchase price is $225,000, the gift of equity would be $25,000.

Step 3: Document the Gift of Equity in the Purchase Agreement

The gift of equity should be documented in the purchase agreement. This can be done by adding a clause that specifies the gift of equity and the value of the gift. The clause should also outline the terms of the gift, such as any restrictions or conditions that may apply.

Step 4: Obtain Signatures

Once the gift of equity clause has been added to the purchase agreement, both parties should sign the document. This will help to ensure that both parties are aware of the agreement and can be held accountable for complying with the terms.

Step 5: Submit the Purchase Agreement to the Lender

Finally, the purchase agreement should be submitted to the lender. The lender will review the agreement to ensure that it complies with their requirements. If the gift of equity is approved, the funds will be applied to the down payment.

In conclusion, a gift of equity can be a valuable tool when purchasing a home. However, it is important to ensure that the gift is properly documented in the purchase agreement. By following these steps, you can help to ensure that the gift of equity is properly documented and approved by the lender.