Buying a home has become increasingly challenging, with mortgage rates (1) and home prices (2) both soaring in recent years. So it's no surprise that around 25% of young people (3) who actually managed to buy a home had help from their family with a down payment.
But what if your family doesn't just give you a down payment, but instead they sell you an entire home at a substantial discount?
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Let's pretend, for example, that Chris and Megan, who are in their 30s, have been married for a few years, and Megan's parents want to sell the couple their $800,000 home for $400,000.
Chris and Megan want to figure out the best way to structure the deal so it works out for everyone involved. What should the couple do, and is this a good option for them to get a property of their own?
While it may seem like a smart approach for Megan's parents to just sell them the house for half off, that's not actually the best method, according to mortgage experts.
"I would not recommend simply lowering the purchase price," Byron Davis (4), founder of ShopDPA and a mortgage loan originator with Primary Residential Mortgage, Inc., told Moneywise. "Instead, I would recommend structuring the transaction at the property's full market value using a gift of equity and seller concessions to cover the buyer's down payment and closing costs."
Davis told MoneyWise that this approach would be the best option because it would provide the couple with a better loan-to-value ratio, help them qualify for a better mortgage loan and avoid having to pay closing costs out of pocket.
He laid out the situation the couple in our example is facing and explained that, if a borrower has a $400,000 first mortgage on an $800,000 property, this results in a 50% loan-to-value ratio: "Financing only 50% of a property's value represents significantly less risk than financing 80%, 90% or 95%. That lower risk can translate into more favorable mortgage pricing."
Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage, agreed that the difference between the appraised market value and purchase price should be considered a gift of equity, and said that most mortgage lenders should be fine with doing the deal this way.
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
