Home Buying in 80237>Question Details

Helloo, Home Buyer in 80237

I am purchasing my parents home. I do not have the required 20% down payment to avoid the PMI. The home is worth $230k but I am purchasing it for

Asked by Helloo, 80237 Thu Dec 3, 2009

$185K, which is their payoff.

My question is can I act like I am buying the home for $230K, borrow the 20% downpayment from my parents for closing (my loan is for $185k), and my parents would get the downpayment back after closing?

Basically giving me a loan for the downpayment which would be returned to them after closing since that is essentially the equity they have.

Help the community by answering this question:


This situation seems perfect for doing a gift of equity. The purchase price on the property would be $230,000 and your parents would give you a gift of equity of 20% of the purchase price. This would make your loan amount $184,000, which you indicate you have already qualified for. Most lenders will not require you to come up with cash of your own if the gift of equity is 20% or greater of the purchase price (assuming the property appraises for at least $230,000). There would have to be a standard gift of equity letter from your parents, but no cash would have to change hands. This is a common and very normal transaction that most lenders will allow. With a gift of equity you don't have to borrow any money from your parents or play any games with the numbers.
Web Reference: http://www.ratewindow.com
2 votes Thank Flag Link Thu Dec 3, 2009
Thanks for confirming what I had to say Bruce. I guess this proves that at least some of us know what we are doing. I checked guidelines of one of our local banks that is, if anything, stricter than most. They will allow for gift of equity without any funds contributed by you, but you should be aware of the fact that you will have closing costs. They would also want a contract written up between you and your parents, stating that you are purchasing the home from them for $230,000, with a gift of equity of the 20%, plus the gift letter, as Bruce mentioned.
1 vote Thank Flag Link Thu Dec 3, 2009
I am not 100% sure of what you want to do, but am I correct that all your parents want is for their loan to be paid off? The bank may want you to show that you have some of your own funds in the transaction, but your parents might be able to show a contract for the full price of $230,000, which the house would have to appraise for, and show you getting a gift of equity of 20%. Do you have $11,500 to put into the deal?Technically, your loan can only be for $184,000 to avoid PMI. You would have to pay closing costs out of pocket. Because guidelines change all the time, I would want to double-check how banks look at gift of equity before saying this is a definite go.
1 vote Thank Flag Link Thu Dec 3, 2009
Dear Helloo,

As much as you might not want to spend any more money, I would suggest consulting with a tax specialist, both for the benefit of you and your parents. Minimizing the tax burden is worth the fee for an hour or so consultation.

Best of luck with your purchase!
0 votes Thank Flag Link Wed May 22, 2013
The gift of equity is coming from my Step Father, as my Mom has passed away. Please advise. Bill
0 votes Thank Flag Link Mon May 20, 2013
Thanks, Robin, I do understand all that. But in Colorado there are strict guidelines for how loans are structured, and lenders here have to be licensed. In his question, he was not discussing an "equity gift", but borrowing from his parents. This is 100% financing. With a "gift letter", it would certainly be an 80% LTV.
0 votes Thank Flag Link Wed Dec 16, 2009
Tracy, with a gift of equity the LTV is not 100%, it is 80. Also, with 20% down there is no need for the borrower to have their own funds in a transaction.
0 votes Thank Flag Link Wed Dec 16, 2009
P.S. - The "equity gift" idea earlier is a great idea. This is a transaction where you need assistance to "think outside the box". At all events, you still need a Contract to Buy and Sell Real Estate.
0 votes Thank Flag Link Wed Dec 16, 2009

Probably any conventional lender you would use would want you to have some of your own funds in the transaction. But doing it the way you are suggesting doesn't get you out of PMI. The total amount of the financing is still 100%.

There are more creative ways of doing this transaction. Talk to a qualified real estate attorney and ask him to write a purchase contract that allows your parents to carry back a $45,000 note, while you assume their $185,000 balance. Or do a wrap-around mortgage, but again don't attempt it on your own. Work with a qualified attorney. Good luck!!

Tracy Howard
Real Estate Consultant
Keller Williams Realty Downtown
Denver, CO
0 votes Thank Flag Link Wed Dec 16, 2009
What the house is "worth" doesn't matter. Down payments are based on sale price. It benefits you, actually, because the 20% number is going to be less than a $230k price by $9k. Still, you might not be able to come up with $37k. In which case, you really ought to consult with a lender who can walk you through the steps of proper gifting, securing a non-conventional loan or simply collecting the down payment before initiating the transaction.

I'm assuming that the lender you choose will provide the most ethical option, while still allowing you complete the transaction. If not, maybe your parents will carry the note for you while you come up with the proper down payment. It sounds like there are a few that have answered already that can give you more in-depth advice.
0 votes Thank Flag Link Mon Dec 7, 2009
Hi Helloo,

The are many options that you can consider to achieve your goal. However, what you suggest above won't work for what you want to do. Depending on how much short you are, you may be able to get special loan programs that will allow you to avoid PMI. Two of these are offered as a special FHA loans.

Contact me at 303-856-8980 and I can provide you with the details of the different options as they are to detailed to discuss in this forum.

Best regards,

Ethan Besser
Broker Associate
Keller Williams - DTC
Cell: 303.856.8980
Fax: 303.221.2289

The Besser Choice in Real Estate!
0 votes Thank Flag Link Thu Dec 3, 2009
Touch base with this gentleman:
Eric Kulbe
Guild Mortgage Company
Branch Manager
Direct Office Line: 720-746-4062
Cell: 303-717-0293

He is the best lender out there and will help you find the right solution. Best, -John
0 votes Thank Flag Link Thu Dec 3, 2009
I'm sure there are quite a few mortgage brokers on here biting their tongues right now about this question. Can you do what you are proposing, that is, borrow the money from your parents, put it in your own account, lie to the mortgager that it is in fact a gift or is your own funds, and complete the transaction? yes, you probably can...should you is an entirely different question.
Web Reference: http://www.stuartdobson.com
0 votes Thank Flag Link Thu Dec 3, 2009
I don't think that your scenario will fly by the lender but here's an idea: If you are getting a conventional loan some lenders will allow you to make a one time payment which purchases the PMI policy and avoids the monthly recurring charge. Your parents could concede that as part of the closing costs- they can also buy donw your interest rate. It would entail you paying a tiche more for the home- and then your parents utilizing the overage to pay those costs instead of take cash away from the closing. Here's the idea- if you have to come up with say $3000 at the closing table- well that's 3000 out of pocket- but if you add 3000 to the purchase price it gets amortized for the life of your loan- so if you have a 30 year loan at say 5% that same $3000 will add $16.10 to your payment and you would have to hold the loan for the full 30 years to pay it back. Conversely your PMI will be a monthly drain, which is tax deductible but certainly more than the 16.10. If this isn't clear feel free to call me and I will try to clarify.
Good Luck-
0 votes Thank Flag Link Thu Dec 3, 2009

No you can't do that, but why not go with the mortgage insurance and then refinance later with no mortgage insurance, by having your parents pay the loan down to 80% loan-to-value?

0 votes Thank Flag Link Thu Dec 3, 2009
That is something you want to speak to your lender about but it doesn't sound right. Have you considered an FHA loan? There are many buyer programs that you might qualify for. Perhaps you could get a loan for a slightly higher interest rate and not have the PMI. You would be paying the same payment but more would go toward interest which could be a tax deduction for you. Make sure what ever you do always consult an attorney and tax professional.
0 votes Thank Flag Link Thu Dec 3, 2009
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