Many parents will have paid off their house or owe little on it and decide to give the house to their kids to help them get started with their lives. Ok, so maybe they do that.
Instead of charging the kids full price, they sell them the house for what they owe on the mortgage or for a much smaller amount that its worth. This is called a gift of equity.
If you (the kid) are in a position to take over the house and make new mortgage payments then this article is not really for you. What I am going to discuss is for those who are getting the gift of equity but have credit card debt or want to remodel the house but don’t have the cash to do so.
It starts with you (the kid) calling a mortgage company and telling them you are getting a gift of equity from your parents. The mortgage company knows the house is worth more but when you get qualified on the loan you are getting qualified at 100% LTV (loan to value) of the house. When this happens the kid will be (probably) charged PMI (private mortgage insurance) on top of their mortgage payment.
Remember, the mortgage company goes off the sale price of the home when purchasing. Not what its worth. Unless you are willing to put 20% down from the sales price to get rid of PMI then you will be paying it.
In this scenario you do not want to put any money down. Whats most important is getting in the house.
Guidelines change with mortgage companies and some may still require you to put some money of your own down even with the gift of equity. Find a mortgage company that allows you to put the least amount down.
Congrats. You’re a homeowner.
Let’s say you received a 50% gift of equity in the home. And you feel comfortable taking out a new loan up to 80% of the value of the home which removes PMI and gives you enough money to pay off the credit cards and for the remodel. You now need to refinance the mortgage you just took out.
Call up a new mortgage company around the time you receive your first payment. Should be two weeks or so after closing. Make your payment of course.
The reason why you do not want to call the original mortgage company back is because it will ruin one of the two ways mortgage companies get paid. Which are collecting interest or selling your loan on the secondary market.
When banks sell your loan there is an agreement that if the homeowner sells or refinances within four months of the loan closing than the mortgage company that originated the home loan must pay back the proceeds to the larger bank that bought the loan. This is called the “recapture period”.
If you tell the original mortgage company you plan on doing this there is a chance they will not do the mortgage for you in the first place. They would be wasting their time on you.
They will be forced to give the money back and their commission. Be expecting a call from an angry loan officer wondering why you are doing this. They will find out because once you get in process with the next company a pay off letter is sent to whoever holds the mortgage note.
The new mortgage company does not care that you just closed on the loan a month prior. They are in business to make money and here is an opportunity to do so. And that’s what you do. You start the refinance process with the new mortgage company.
You know what the home is going to appraise at because an appraisal was done when you bought the home a month prior. This gives you exact amounts to work with in regards to paying off your credit card debt and money available for remodeling.
What will also happen is the PMI you were paying with the first loan will go away because you will now be using the appraised value of the home and not what it was sold to you at. In some cases you might see your payment go down even though you are borrowing more.
When looking for your new mortgage you may find some companies will not use the appraised value until 6 months after you bought the home. They call this “seasoning”. Basically, they use the purchase price until you’ve been in the home for 6 months.
Its a way for the mortgage companies to cover their butts. Fear not, you should be able to find some company that will refinance your mortgage a month after you bought the house.
You may run into the same issue if you bought the home with a “Jumbo Loan” or with a regular 30 year fixed and a Home Equity Line Of Credit (called a piggyback loan).
It’s extremely nice when someone gives you a gift of equity to get in the home. It can give you a big head start in regards to your financial future.
The only downside to having to refinance your home again in the scenario I outlined above is you will have to pay closing costs again. Of course the mortgage company will roll the closing costs into your loan so you do not have to come out-of-pocket with any cash.
Mortgage guidelines change all the time and you might be able to find a mortgage company that will use the gift of equity to consolidate the credit card debt and give you the money you need to remodel at the time of purchase. That would save you a ton of time and effort going through this process again.
It might be best to tell a mortgage company or two about using the gift of equity to do those things when trying to purchase to get a feel for what mortgage companies are doing at the time. If they will not do it then you will have to do what I wrote above.
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