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When the amount of gift equity is known at the time of initial disclosure, should the gift equity amount be disclosed on the Loan Estimate in the calculating cash to close section as a seller credit or adjustments and other credits? There does not appear to be any clear cut guidance in 1026.37(H)(1)(vi) or (vii). Thank you
Dear ADJ0819,
Let’s get the conversation started.
A gift of equity can take several forms. A parent can gift funds to child to offset closing costs. When a seller sells a property for less than the fair market value the difference between the sales price and the fair market value is sometimes referred to as a gift of equity.
In the case of a family gift, the amount is disclosed as an “other credit” in the cost to close section of the Loan Estimate (LE) and the Closing Disclosure (CD).
In the case of a sale for less than market value there are various opinions on the proper method of disclosure. We believe the safest approach is to disclose the contract sales price. The instructions for the LE and CD require the contract sales price be disclosed as “sales price” in a purchase transaction. Consumers purchasing a home for less than the fair market value prefer that the fair market value be shown as the purchase price, since that higher number improves the loan-to-value ratio. Using the higher number results in the “gift of equity.” The TRID regulations and related guidance do not address the disclosure of this arrangement.
I would like to open this discussion again as we are running into the issue of having gift equity ($64,200) along with seller credit ($5,000). The LE is showing a sales price of $321,000 and a loan amount of $256,800. The gift equity is reflecting in the difference in the sales price and the loan amount (20% down payment). If the family memeber, who is the seller, is gifting the 20% down, should we not be showing the sales price with the 20% off? If we are already reflecting the gift equity on page 1 of the LE would we even need to show it in the Calculating Cash to Close table on page 2?
Each of these items needs to be shown as what they are. One as seller credit and the other as a gift. Similar to the prior post – A sale for less than market value there are various opinions on the proper method of disclosure. We believe the safest approach is to disclose the contract sales price. The instructions for the LE and CD require the contract sales price be disclosed as “sales price” in a purchase transaction. Consumers purchasing a home for less than the fair market value prefer that the fair market value be shown as the purchase price, since that higher number improves the loan-to-value ratio. Using the higher number results in the “gift of equity.” The TRID regulations and related guidance do not address the disclosure of this arrangement.
As for how to show it. My question back. What does the contract say? Is it a gift or is it 20% off the sales price. If the contract states the sales price is $321,000 then that is what the sales price should state and the gifted amount needs to be shown as such. In our opinion not doing it this way would affect the LTV on the loan.
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The contract states the sales price is $321,000. So, more of my question becomes of where to show the gift equity – in Adjustments and Other Credits or in Seller Credits (the gifting is coming from the borrower’s dad). The transaction also has a $5,000 seller credit to cover closing costs.
Since it is family gift from a relative (parent) the amount ($64k+) is disclosed as an “other credit” in the cost to close section of the Loan Estimate (LE) and the Closing Disclosure (CD). The seller credit ($5k) will be shown in the seller credit area of both the LE and CD.
NOTICE: This email message, including any attachments, is intended only for the addressee, and may contain confidential and privileged information either as protected work product or confidential client information. Any unauthorized review, use, disclosure or distribution is prohibited. If you are not the intended recipient, do not read, copy, retain, or disseminate this message or any attachment, and please contact the sender by reply e-mail or at 888.760.5646 and destroy all copies of the original message and attachments. Neither the transmission of this message or any attachment, nor any error in transmission or misdelivery shall constitute waiver of any applicable legal privilege.
THIS EMAIL AND ITS ATTACHMENTS DO NOT CONSTITUTE LEGAL ADVICE
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