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Currently my wife and I are living in a home is owned by her parents. We plan to buy it from them once we get other debts paid off and they're willing to sell it to us for the original price they paid for it 3 years ago ($250,000). Prices in the area we live in have gone up consistently and now the home is valued at $315,000. So my question is, if we get a loan from the bank for $250,000 to purchase a home valued at $315,000 will they require us to provide a 20% downpayment or pay for private mortgage insurance?

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If we get a loan from the bank for $250,000 to purchase a home valued at $315,000 will they require us to provide a 20% downpayment or pay for private mortgage insurance?

You can use gifted equity as a down payment. For a conventional loan if the down payment is 20% or higher it can all come from a gift, if it's less than 20% then only some of it can come from a gift and they'll collect PMI.

In your example, if the appraised value is $315k then you will have a down payment of:
(315-250)/315 = 0.206 = 20.6%

So you'd avoid PMI and wouldn't need to supplement the down-payment with any cash out of your pocket. You'd likely pay for the appraisal out of pocket, so you'd want to be pretty confident the appraisal will be high enough and also have enough cash on hand to make up the difference if the appraisal came in a bit lower than expected. Also, mortgage rates get a little better at 25% down payment, so if it appraises a bit higher than expected it might be worth throwing some extra cash at it to get a lower rate.

Talk to lenders about their specific requirements, but in general you'll need a letter from her parents that states it is a gift and not a loan, and of course an appraisal by someone the lender of approves of to establish home value.

Since the amount of this gift exceeds the annual exclusion ($15K per person) then her parents will have to inform the IRS of this gift on their tax return and either pay gift tax on the amount in excess of the annual exclusion or just count the excess against their lifetime exemption. Note that since the annual exclusion is per person, each of her parents can give each of you $15k, so up to $60k gifted before a filing requirement with the IRS.

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  • Excellent, thanks for the answer! – minoshino Dec 15 '19 at 15:33

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