Any thoughts on using existing equity in the condo I want to purchase as the down payment?

Question

I share a condo and want to purchase it. My name is not on the deed, nor is it on the mortgage. However, I have consistently paid toward home ownership. Since the idea of purchasing the condo came up, we were thinking that I could set a purchase price and get a loan for 80% of that amount. The seller would use existing equity as the down payment and it would not involve PMI being added to my mortgage. What is wrong with this senario?

PS we are aware that transfer taxes and closing costs will need to be paid at closing. Are you aware of pros & cons for using existing equity in paying these costs?

Answer 1

What you're describing is called a "gift of equity". That is done by parents/grandparents to kids all the time. A non-relative must usually prove a long-standing personal relationship, one that could justify such generosity.

Transfers of property between two people who know each other makes banks nervous. Apparently it gives more opportunities to defraud the bank. I'm not saying that's you, just to expect a few extra hurdles because of this.

You'll want to check out whether the seller could be obligated for a gift tax. Just to cover that base, talk to a CPA or other tax professional.

All that being said, as long as the appraisal supports your purchase price, and you do the gift of equity, what you are proposing is possible. I've closed many loans like this.

If the appraisal can't get you 20% equity, you might need to go FHA, or make sure your lender uses Freddie Mac, not Fannie Mae for a conventional loan. That's one of the rare spots where Fannie and Freddie are quite different.

Answer 2

fukinluck... is mostly correct. But for a loan to be purchased in the conforming loan market, any gift must be from a relative. There is no exception for proving a longstanding relationship.

Additionally, the purchase price will be the price you actually pay for the home. If there is a discounted price because of something that previously happened, the discounted price is treated as the total purchase price. The loan would require mortgage insurance.

You keep mentioning existing equity in the information you provide. As you have no ownership in the home, you have no equity as far as any lenders are concerned. If the present owner gives you equity - the gift of equity - that equity is not considered in determining the value of the home. So, if you purchase condo that appraises for $100,000, pay $75,000, but are being given the $25,000 in equity, for determining the LTV of the loan, the lender would use $75,000 as the value of the home. The value is always the lower of the purchase price or appraised value. Gift equity is not part of the purchase price.

Answer 3

do it