We often have buyers purchasing properties from close family members. These buyers often have minimal cash for a down payment, and the sellers (often parents) are willing to help the buyers out.
In these situations, the best option for a down payment is a “gift of equity.” As long as the down payment is 20% or more, or as long as the loan-to-value is 80% or less, the entire down payment can be a gift of equity. No funds at all need to come from the buyer for the down payment.
The sellers simply have to attest the gift.
Often times we simply back into a purchase price by figuring out the desired loan amount, and then figuring out the purchase price simply by dividing the loan amount by 80% (to keep the loan-to-value ratio at 80% or less).
If the “gift of equity” is less than 20% of the purchase price, the buyers will have to come in with at least 5% of their own funds.
As an aside, there is one more benefit from kids buying from parents: the kids can usually “assume” the parents’ property tax basis by filling out a special form with their county assessor.
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