Gift of Equity Help and Potential Rental Property

11 Replies

Hello BP forum, 

I've been doing a bit of research and keep running into obstacles. Here's my scenario:

My retired parents (who live in another state) would like me to take over their mortgage. Ideally the want to give me a Gift of Equity (market value - remainder of existing mortgage) as a down payment. The twist is, they would be staying in the house and renting from me, making me a landlord and the property an investment (as I understand it). 

From what I've read, Gifts of Equity can't be used towards investment properties (only primary and second homes), and I don't think the lender will allow it to qualify as a primary (since I'm out of state). 

The question is, is there any way to take over my parents mortgage, while still somehow utilizing the Gift of Equity and turning it into an investment property? 

I'm sure someone has run into this issue here. I'd really like to keep the house in the family and establish a real estate portfolio in the process. 

Any help would be greatly appreciated. 

Marc

Highly unlikely that the mortgage can be assumed by you.  They have to sell you the property for the remaining balance on the mortgage.  Then you have a new mortgage for whatever was still owed and property and mortgage are in your name.  Since it was sold to you at the value of the old mortgage, whatever equity there was is now yours too.

Thanks for the reply. 

And just to clarify: 

"The question is, is there any way to take over my parents mortgage, while still somehow utilizing the Gift of Equity and turning it into an investment property?"

means -- "The question is, is there any way for me to buy my parents' place, while still somehow utilizing the Gift of Equity and turning it into an investment property? 

Per your kind response, so how does the lender's appraisal of the house come into play? In a traditional GoE scenario, the house appraises for say 300k, they still owe 200k, and the GoE is 100k (which is used as a down payment on a 200k mortgage). If I interpreted what you're saying correctly, my parents could ignore the lender appraisal and GoE, and just sell me the house for what they owe? In other words, gifting me the equity just without the paperwork? Is the benefit just to get around the potential rental property issues?

Thanks again. 

Marc

Marc - Good Question.  Regardless of purchase price the lender will only lend on the lower of the purchase price or appraisal.  In your case the purchase price would be lower, so they would loan on that amount.  Do you own any other property?  If not, and given that it’s just your parents living there, Personally I’d go for an owner occupied loan (say you will live there).  This way you get a better rate and lower down payment.  You would still have to come to the table with a down payment, but for owner occupied you can use gift money for down payment — you could play around with the purchase price to make this work if you don’t have any cash.

Thanks for the reply again!!

Nah, don't own any others just yet. 

Forgive my ignorance, but won't the lender not allow me to do an owner-occupied mortgage since I'm out of state and won't be able to fulfill any potential residency clauses (i.e.-- living in the home for 1 year or something)? 

And the issue would still be I need the property to be rental so I can claim the expenses, but that brings me back to the problem of not being able to use the GoE with investment/rental properties.  

Am I missing something or overthinking? 

Marc

Hi All, I just had a follow-up question after looking more into sub2s -- 

In the *rare* event a mortgage is called due on sale by the lender, typically the options are to 1. refinance, or 2 cut a check for the remaining balance of the loan, correct? #2 isn't really an option

In the eventuality of #1, what are the costs incurred (how much money needs to be in reserve) to ensure refinancing can be covered? Is it just the normal costs of refinancing?

What happens to the equity in the home if called due? Is it just preserved since the refinance is just on the remainder of the loan? 

So worst-case scenario for doing a sub2 on my parents place is the bank calls the mortgage due and I refinance, pay the $5k (estimated) in closing costs for the refinance (I'd lower the term, and the loan amount will be less than 80% of the market value) and the mortgage is now in my name, but I still have the equity. 

Am I seeing this clearly?

Thanks

Marc

Obviously can’t use as primary but why not use as second home? It is not unacceptable to allow your family to occupy your second home, you are still considered the owner occupant under Code B2-1-01 (2019) so you could definitely receive the gift of equity and apply it towards a down payment at closing. 

Danielle, 

10 yrs RE/MAX