We have an application for a loan to a consumer to be secured by a residence that is being gifted in full as a part of the transaction, but loan funds are being used to payoff debts of other consumers who are not borrowers. Should this be disclosed as a Purchase since the related legal filings will transfer initial title to our borrower, or a Home Equity since the loan proceeds are being used to payoff other unrelated debts?
More detail in case helpful: this is related to an estate. Father passed away and house was deeded with right of survivorship to child A. Child A is gifting house completely to Child B, our borrower, who is using loan proceeds to pay off debts of the estate.
It seems like home equity, but I’m getting caught up in the transfer of the title as a part of the transaction. Does the aspect of the small portion of closing costs paid to attorney to transfer the title qualify as financing the acquisition and make it a Purchase?
It appears the title may have to be transferred twice, once from the estate to child A (to meet the terms of of the estate), then from child A to child B. Be sure to check tax obligations on the transfers.
Neither the law, the regulation, the official interpretations nor the small entity compliance guide addresses this question. In the second transaction it appears that child B is purchasing title for the property securing the loan. The sales price is the amount of debt owed by the estate. If that amount is listed in the contract of sale then it should be shown as Purchase Price.
The debt of the estate could also be viewed as a payoff of additional debt of the seller, in which case the transaction would be listed as home equity, rather than home purchase.