Will DSCR lenders allow a gift of equity?

Question

Hi there.  My dad wants to sell his house to me with a gift of equity.  House is worth 500k, owned outright.  He wants to do a gift of equity of 250k and have me finance the other 250k.  However, this will be a rental property, and I am quickly learning that no conventional lender will allow the gift of equity on an investment property.  Does anyone know if any DSCR lenders will allow this?  If not, could he carry the 250k as a second lien and forgive it later?  Thank you.

Stephanie Medellin · Answer

Hi Shannon,

What state is the property located in?

Would your dad be willing to add you to title and just have you refinance into your name?  Since he's not looking for additional funds, this would be a straight rate and term refinance, rather than looking for someone to allow a gift of equity.  You'd have to look into any tax implications of doing it this way.

Erik Estrada · Answer

The easiest way around this is to QCD the property into an LLC, have yourself as the majority owner, wait 90 days, and then cash out to pay him off. Most lenders will allow you to take out 75-80% LTV

AJ Exner · Answer

Hey Shannon,

There are mixed feelings on GoE even in th DSCR space, but there might be some options available.

The most helpful thing is obviously being up front with the situation. Telling them exactly what is needed up front should help.

Otherwise, would your dad just jump on an entity with you, refinance it together, and then come off of the entity after the refi? With DSCR lenders, as long as you are the primary guarantor you should be able to sign off on it and get it done a little easier that way.

Chris Seveney · Answer

You are better having it in a LLC whereby you and your dad are partners 50/50 and he contributes the equity to the property - then later on your dad gifts you the LLC. the issue is he is going to be on the loan though.

Otherwise it is unlikely from the institutional lenders,  a lender typically will not allow a gift of equity in that amount unless they are a balance sheet lender.

Jake Yuskaitis · Answer

i know of a few lenders that will do this but if seasoned in an LLC for 2 months it shouldn't be an issue.

Jay Hurst · Answer

We allow a gift of equity on our balance sheet product, but I have not found a secondary market (the vast majority of DSCR products) that allow for a gift iof equity. As you will not find a conventional loan that allows for a gift of equity as it is against Fannie/Freddie rules. They do allow for gift of equity on primary home or second homes, but not investment property.

Jeremy Horton · Answer

Have you ran rental estimates on the property?

I'm just asking because it seems like there would be a better way to do this. That's a lot of equity to have in the property and the ROE may be low. Assuming this is a long term rental?

Can your dad just sell you the house for $250k? Seems like people do this with wholesaling, foreclosures etc. Seems like you'd just get a really good deal.

Will DSCR lenders allow a gift of equity?

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