Buying a home from a parent, grandparent, or another family member may create financing opportunities that are not available in a traditional sale.
One option is a gift of equity.
A gift of equity occurs when a property owner sells a home to an eligible buyer for less than its current market value and gives the buyer some of the difference as equity. Depending on the mortgage program and transaction, that equity may help satisfy part or all of the buyer’s down payment or closing requirements.
Although no physical cash may change hands for the gift, the transaction still requires careful documentation. The mortgage lender must verify the property value, relationship between the parties, sales terms, equity gift, title, and borrower’s overall eligibility.
A gift of equity can make purchasing a family property more manageable, but it should be planned with mortgage, legal, tax, appraisal, and title professionals before the purchase agreement is finalized.
Key Takeaways
- A gift of equity is created when an eligible seller transfers part of a property’s value to the buyer through a below-market family sale.
- The gift may help with a down payment, closing costs, or financial reserves when permitted by the loan program.
- A gift of equity is not a separate cash payment deposited into the buyer’s bank account.
- The property usually must be appraised to establish its value for mortgage underwriting.
- A gift letter and additional transaction documents are normally required.
- Buying from a relative is considered a non-arm’s-length transaction and may receive additional underwriting review.
- A gift of equity does not replace the borrower’s income, credit, employment, or ability to qualify for the mortgage.
- Sellers and buyers should consult tax and legal professionals about potential gift-tax, capital-gains, estate-planning, and cost-basis consequences.
What Is a Gift of Equity?
A gift of equity is the portion of a property’s value that an eligible seller gives to the buyer as part of a home purchase.
Consider a simplified example:
- Appraised property value: $350,000
- Agreed purchase price: $300,000
- Difference between value and price: $50,000
The seller may be able to provide some or all of that $50,000 difference as a gift of equity, subject to the selected mortgage program and lender requirements.
The buyer does not receive $50,000 in cash. The value is reflected within the structure of the purchase transaction and closing documents.
The lender determines how much of the equity may be credited toward the buyer’s required investment, closing costs, reserves, or other permitted expenses.
Gift of Equity vs. Cash Gift
A gift of equity and a cash gift can support a buyer in different ways.
Cash gift
With a cash gift, an eligible donor transfers money to the buyer or closing agent. The funds may be used for permitted expenses such as:
- Down payment
- Closing costs
- Prepaid expenses
- Financial reserves
The lender may verify the donor, gift letter, transfer of funds, and source of the money.
Gift of equity
With a gift of equity, the seller gives the buyer a portion of the property’s value through the sale. There is no separate transfer of gift money into the buyer’s account.
The lender may verify:
- The buyer and seller’s relationship
- The property’s appraised value
- The purchase price
- The amount of equity being gifted
- The gift letter
- The purchase agreement
- The seller’s ownership
- Existing mortgages and liens
- Final closing figures
A family transaction can potentially include both a gift of equity and a cash gift, but each contribution must satisfy the applicable mortgage guidelines.
Who Can Provide a Gift of Equity?
Eligibility depends on the mortgage program.
Acceptable donors may include certain relatives or other individuals with an eligible relationship to the borrower. A parent selling a home to an adult child is a common example.
Other possible relationships may include:
- Grandparents and grandchildren
- Siblings
- Aunts or uncles
- Domestic partners
- Fiancés
- Legal guardians
- Other relatives defined by the loan program
Do not assume that every friend, employer, business partner, trust, estate, or unrelated seller qualifies as an acceptable donor.
The mortgage professional should confirm donor eligibility before the parties set the purchase price or sign a final agreement.
Why Would a Seller Give Equity?
A homeowner may decide to sell below market value for several reasons.
Helping a family member become a homeowner
Parents or grandparents may want to help a relative purchase a home without giving a large amount of cash.
Keeping a property in the family
A family may prefer to transfer a longtime residence, vacation home, or inherited property to another relative.
Simplifying a planned sale
The owner may already know who should receive the property and may not want to market it publicly.
Supporting multigenerational housing
A family member may purchase a home to live near relatives, care for an aging parent, or create a stable long-term housing arrangement.
Coordinating estate-planning goals
A transfer may be part of a broader financial or estate plan. This requires qualified legal and tax guidance because the mortgage transaction is only one part of the decision.
How Can a Gift of Equity Help the Buyer?
Depending on the program, the gift may help reduce the amount of cash the buyer needs at closing.
Potential uses may include:
- Meeting a down payment requirement
- Reducing the required loan amount
- Paying eligible closing costs
- Covering prepaid taxes and insurance
- Establishing required reserves
- Improving the loan-to-value ratio
Not all programs permit the same uses. Some borrowers may still need their own funds for certain costs.
A gift of equity also does not necessarily eliminate mortgage insurance. Mortgage-insurance requirements depend on factors such as the loan type, loan-to-value ratio, occupancy, and current program guidelines.
How Loan-to-Value Ratio Is Calculated
Loan-to-value ratio, commonly called LTV, compares the mortgage amount with the property value recognized by the loan program.
A simplified formula is:
Loan amount divided by property value equals LTV
Suppose:
- Appraised value: $350,000
- Purchase price: $300,000
- Gift of equity: $50,000
- Proposed loan amount: $280,000
Dividing $280,000 by $350,000 produces an 80 percent ratio.
This example does not establish how a specific lender will calculate the transaction. Certain programs may base LTV on the lower of the purchase price or appraised value, subject to exceptions and rules for gifts of equity.
The mortgage team must review the entire transaction before determining the usable value and required loan structure.
Why an Appraisal Is Important
The sale price is agreed upon by the buyer and seller, but it does not automatically establish the home’s market value.
The lender normally orders an appraisal to obtain an independent opinion of value. The appraiser may evaluate:
- Property condition
- Location
- Size and design
- Site characteristics
- Recent comparable sales
- Marketability
- Improvements
- Observable health or safety concerns
The appraisal helps the lender determine whether the stated equity exists.
If the expected value is $350,000 but the appraisal supports only $320,000, the potential gift of equity may be smaller than the parties planned.
A lower appraisal could require:
- A smaller equity gift
- A revised purchase price
- A different loan amount
- Additional buyer funds
- A different mortgage structure
- Cancellation if permitted by the purchase agreement
The seller’s opinion, online estimate, tax assessment, or previous appraisal may not be accepted as the value for the new mortgage.
What Is a Non-Arm’s-Length Transaction?
A transaction is generally considered arm’s length when the buyer and seller act independently and do not have a close personal or business relationship.
A purchase between family members is typically classified as non-arm’s length.
This does not mean the transaction is prohibited. It means the lender may conduct additional review to verify that:
- The sale is legitimate.
- The buyer intends to occupy the property as represented.
- The value is adequately supported.
- The parties have disclosed their relationship.
- The purchase agreement reflects the actual arrangement.
- There are no hidden repayment obligations.
- Funds and credits are accurately documented.
- The seller has authority to transfer the property.
- The transaction complies with the selected loan program.
Full disclosure is essential. Buyers should inform the mortgage professional immediately when purchasing from a relative, employer, landlord, business partner, or another person with whom they have a relationship.
What Is a Gift Letter?
A gift letter documents the donor’s intention to provide the equity without requiring repayment.
Depending on the program, the letter may include:
- Donor’s name
- Donor’s address
- Donor’s telephone number
- Donor’s relationship to the borrower
- Property address
- Amount of the equity gift
- Statement that repayment is not expected
- Donor and borrower signatures
- Date of the gift
- Other program-specific certifications
The lender may provide a required form or exact wording.
A verbal promise or a note added to the purchase agreement may not be sufficient. The documentation must satisfy the lender and loan program.
Documents Commonly Required
A family home sale involving gifted equity may require:
- Complete mortgage application
- Executed purchase agreement
- Gift-of-equity letter
- Appraisal
- Preliminary title report or title commitment
- Seller’s deed
- Existing mortgage payoff statements
- Evidence of relationship
- Homeowners insurance documentation
- Property-tax information
- Final Closing Disclosure
- Settlement or closing statement
- Trust, estate, probate, divorce, or business records when applicable
- Documentation of additional cash gifts
- Borrower income, credit, asset, and employment documents
The lender may request additional documents when the property is held in a trust, owned by an estate, inherited by multiple people, or subject to liens.
Can a Gift of Equity Cover the Entire Down Payment?
It may be possible under certain loan programs and transaction structures.
Whether the buyer must contribute personal funds depends on factors such as:
- Mortgage program
- Occupancy
- Property type
- Loan-to-value ratio
- Credit profile
- Automated underwriting findings
- Relationship to the donor
- Size of the gift
- Closing costs
- Reserve requirements
Even if the down payment is fully covered, the buyer may still need funds for:
- Home inspection
- Appraisal
- Earnest money
- Insurance
- Taxes
- Title services
- Legal review
- Moving costs
- Immediate repairs
- Required reserves
The mortgage team should calculate a complete estimate rather than focusing only on the down payment.
Gift of Equity and Conventional Loans
Conventional loan guidelines may allow a gift of equity from an acceptable donor.
The lender will evaluate:
- Donor eligibility
- Gift documentation
- Property type
- Occupancy
- Purchase price
- Appraised value
- Loan-to-value ratio
- Borrower’s required contribution, if any
- Interested-party contribution limits
- Automated underwriting results
Fannie Mae maintains separate guidance for gifts of equity and personal gifts. Under its current guide, a gift of equity from an acceptable donor is not treated as an interested-party contribution when applicable requirements are met.
Individual lenders may apply additional requirements.
Gift of Equity and FHA Loans
FHA financing may also allow gifts of equity when the transaction and donor meet current FHA requirements.
The lender may review:
- The donor’s relationship to the buyer
- The non-arm’s-length nature of the transaction
- The buyer’s occupancy
- The property appraisal
- Gift documentation
- Required borrower investment
- Seller contributions
- Existing liens
- Property condition
FHA rules involving family transactions can depend on the exact relationship and circumstances. Buyers should obtain a transaction-specific review before assuming that the full equity difference can be used.
Can a Gift of Equity Be Used With a VA Loan?
VA purchase financing may offer eligible borrowers favorable down payment terms. A gift of equity may still affect the transaction, loan amount, value calculation, closing costs, and seller proceeds.
VA borrowers should discuss the family-sale structure with a lender experienced in VA requirements. The property must satisfy appraisal and minimum property requirements, and the borrower must satisfy current eligibility and underwriting rules.
A veteran’s home-loan benefit does not eliminate the need for clear gift, title, appraisal, and closing documentation.
What Happens to the Seller’s Existing Mortgage?
If the seller has an outstanding mortgage, it normally must be paid according to the title and closing requirements.
Suppose the home is valued at $350,000, the seller owes $200,000, and the agreed purchase price is $300,000.
At closing, the proceeds may be used to:
- Pay off the seller’s existing mortgage
- Satisfy eligible liens
- Pay agreed transaction costs
- Deliver the remaining proceeds to the seller
- Transfer clear title to the buyer
The gift of equity does not erase the seller’s mortgage balance.
The title and closing professionals must confirm that the transaction produces enough funds to satisfy required debts and convey marketable title.
Can the Seller Receive Cash and Give Equity?
Yes, a seller can potentially receive proceeds while giving part of the property’s value to the buyer.
Using the simplified example:
- Appraised value: $350,000
- Sale price: $300,000
- Existing mortgage payoff: $200,000
- Seller’s gross equity before transaction costs: $150,000
- Gifted equity: $50,000
The seller may still receive proceeds from the sale after the mortgage, liens, closing expenses, and gift structure are accounted for.
Actual figures depend on the final appraisal, purchase price, mortgage amount, title charges, taxes, commissions, concessions, and other closing costs.
Seller Concessions vs. Gift of Equity
A seller concession and a gift of equity are not the same.
Gift of equity
The seller transfers part of the property’s value to an eligible buyer. The gift may support the down payment or other permitted requirements.
Seller concession
The seller agrees to pay certain buyer closing costs or prepaid expenses, subject to mortgage-program limits.
A transaction may potentially include both, but the lender must calculate and document each item correctly.
Excessive concessions can affect loan eligibility. The purchase agreement should clearly identify all seller-paid expenses and equity gifts.
Can the Buyer Receive Cash Back at Closing?
Mortgage purchase transactions generally limit how much cash a buyer may receive at closing.
The buyer may be reimbursed for certain documented expenses or receive a permitted adjustment, but a gift of equity is not designed to generate unrestricted cash proceeds for the buyer.
If the planned credits exceed the buyer’s eligible expenses, the transaction may need to be restructured.
The buyer and seller should not create undisclosed agreements to exchange money after closing. Side agreements can create serious underwriting, legal, and fraud concerns.
All credits, reimbursements, concessions, and payments should be disclosed to the lender and closing professional.
Gift of Equity Tax Considerations
A gift of equity may have federal and state tax consequences.
The IRS generally considers a transfer of property for less than full value to include a gift component. The seller may have gift-tax reporting responsibilities depending on the amount and circumstances.
A reporting requirement does not necessarily mean that immediate gift tax will be owed. The result depends on current exclusions, prior gifts, lifetime limits, ownership, and other tax factors.
The transaction may also affect:
- Seller’s capital gain
- Buyer’s tax basis
- Future gain or loss when the buyer sells
- Estate-planning objectives
- Property-tax treatment
- Depreciation if the property later becomes a rental
- Medicaid or benefits planning
Mortgage professionals do not provide tax advice. Both parties should consult qualified tax advisers before signing the final agreement.
The Buyer’s Future Tax Basis May Be Complicated
The buyer should not assume that the purchase price, appraised value, or mortgage amount automatically becomes the tax basis for every purpose.
IRS rules for gifted property may consider:
- Donor’s adjusted basis
- Fair market value at the time of the gift
- Gift tax paid
- Whether the later calculation involves a gain or loss
- Adjustments made during ownership
A transaction that is partly a sale and partly a gift may require specialized tax analysis.
This matters because basis can affect the buyer’s future taxable gain or loss when the property is sold.
Title and Ownership Issues
Before approving the loan, the title review may identify issues such as:
- Existing mortgages
- Tax liens
- Judgment liens
- Multiple owners
- Deceased owners
- Probate proceedings
- Trust ownership
- Divorce interests
- Unrecorded deeds
- Property boundary disputes
- Easements
- Ownership by a corporation or limited liability company
A seller cannot give equity that the seller does not legally control.
If multiple people own the property, every required owner may need to approve and sign the sale. Estate, trust, probate, or divorce transactions may require legal documents before closing.
Family Agreements Should Be Written Clearly
Family members sometimes rely on informal understandings because they trust one another.
A home purchase deserves complete written documentation regardless of the relationship.
The parties should clarify:
- Purchase price
- Gift amount
- Seller proceeds
- Included personal property
- Repair responsibilities
- Occupancy before closing
- Occupancy after closing
- Existing tenant arrangements
- Property condition
- Closing date
- Tax and insurance obligations
- Whether anyone retains a life estate or occupancy right
- Whether the seller expects future repayment
- What happens if the loan does not close
The purchase agreement, gift letter, deed, mortgage documents, and any separate legal agreements should not conflict.
What If the Seller Plans to Keep Living in the Home?
This arrangement requires additional review.
If the buyer says the property will be a primary residence while the seller remains in the home, the lender may need to understand:
- Who will occupy the property
- When the buyer will move in
- Whether the seller will pay rent
- Whether a lease exists
- Whether the seller retains legal rights
- Whether the property is truly the buyer’s primary residence
- Whether the transaction reflects the parties’ actual intent
The buyer should never misrepresent occupancy to obtain mortgage terms. Occupancy information must be accurate and consistent across the loan application, purchase agreement, insurance policy, appraisal, and closing documents.
Can the Buyer Purchase a Rental Property With Gifted Equity?
Some loan programs may restrict the use of gift funds or gifts of equity for investment properties.
Eligibility can depend on:
- Loan program
- Donor relationship
- Occupancy
- Property type
- Number of units
- Loan-to-value ratio
- Borrower contribution
- Reserve requirements
- Lender overlays
Tell the mortgage professional whether the property will be a primary residence, second home, or investment property before selecting a program.
Common Gift-of-Equity Mistakes
Setting the purchase price before speaking with a lender
The best structure depends on the appraisal, mortgage program, required loan amount, seller payoff, and closing costs.
Assuming the tax assessment establishes market value
Tax assessments and online estimates do not replace a mortgage appraisal.
Using an ineligible donor
Acceptable donor rules vary. Confirm the relationship before relying on the gift.
Leaving the gift out of the purchase agreement
The contract should accurately reflect the family-sale arrangement and required disclosures.
Expecting the gift to fix credit or income problems
Equity may help with the down payment or LTV, but the borrower must still qualify.
Forgetting the seller’s mortgage and liens
The closing must produce enough funds to satisfy debts that must be paid.
Making a hidden repayment agreement
A gift cannot secretly function as an undisclosed loan.
Ignoring taxes
The transfer may affect gift reporting, capital gains, and the buyer’s future basis.
Skipping the home inspection
A family relationship does not guarantee that the home is free from defects.
Assuming the buyer will receive cash
A gift of equity is generally a value credit within the transaction, not a cash payout.
Questions to Ask Before Moving Forward
Buyers and sellers should discuss:
- Is the donor eligible under the proposed mortgage program?
- What is the property likely worth?
- How much does the seller owe?
- How much equity does the seller want to give?
- How much cash does the seller need to receive?
- Will the buyer occupy the property?
- Does the buyer qualify based on income, credit, debts, and assets?
- Will the buyer still need personal funds?
- Are closing costs or seller concessions involved?
- Who currently holds title?
- Are there liens, probate issues, or other ownership complications?
- Does the home need repairs?
- What are the tax consequences?
- Will the seller continue living in the home?
- Does the transaction support the family’s long-term goals?
These questions should be answered before the final purchase agreement is prepared.
A Practical Gift-of-Equity Timeline
Step 1: Speak with the mortgage team
Explain the relationship, property, expected value, proposed price, occupancy, seller payoff, and desired gift.
Step 2: Review borrower qualification
The lender evaluates income, employment, credit, debts, assets, and available mortgage programs.
Step 3: Consult legal and tax professionals
The parties review ownership, gift reporting, capital gains, tax basis, estate-planning concerns, and contract terms.
Step 4: Prepare the purchase agreement
The agreement should accurately describe the price, equity gift, concessions, included property, contingencies, and closing responsibilities.
Step 5: Order title work and appraisal
The lender and closing professionals evaluate value, ownership, liens, and transfer requirements.
Step 6: Complete gift documentation
The donor signs the required gift letter and provides any additional requested information.
Step 7: Address property conditions
Complete inspections and negotiate repairs. Required repairs may need to be finished before closing.
Step 8: Review final figures
The buyer and seller review the Closing Disclosure and settlement statement to confirm that the gift, loan, payoff, expenses, and proceeds are correctly shown.
Step 9: Close and transfer title
The parties sign the required mortgage, deed, title, and closing documents.
How The Faille Team Can Help
The Thomas Faille Mortgage Team helps homebuyers evaluate conventional, FHA, VA, jumbo, renovation, and other residential financing options.
For a family home sale, the team can help:
- Review borrower qualification
- Confirm whether the proposed donor is eligible
- Compare potential loan programs
- Estimate the required loan amount
- Explain gift documentation
- Coordinate appraisal and underwriting requirements
- Identify possible title or transaction concerns
- Estimate funds needed at closing
- Communicate with the closing and real estate professionals
- Guide the borrower from application through closing
Every family sale is different. Starting with a full mortgage review can help the parties structure the transaction around actual financing requirements instead of assumptions.
Frequently Asked Questions
Does a gift of equity require cash?
No. The gift generally comes from the difference between the property’s supported value and the price paid by the buyer.
Can my parents give me equity in their home?
Potentially. Parents are commonly eligible donors under several mortgage programs, but the lender must review the transaction.
Do I need a gift letter?
Yes, lenders generally require a gift letter and supporting transaction documents.
Does the seller have to own the home free and clear?
No. The seller may have an existing mortgage, but required liens generally must be satisfied through the closing.
Can the gift cover my entire down payment?
It may under certain programs. Eligibility depends on the loan, occupancy, relationship, property, underwriting, and transaction structure.
Is an appraisal required?
Most mortgage transactions require an appraisal or another approved valuation method. The lender needs to establish the property value used for underwriting.
Can I use a gift of equity to pay closing costs?
Possibly. Permitted uses depend on the loan program and how the transaction is structured.
Will I automatically avoid mortgage insurance?
No. Mortgage-insurance requirements depend on the loan program, LTV, occupancy, and other factors.
Does the seller owe gift tax?
The transaction may create a gift-tax reporting issue, but reporting does not always mean tax is immediately due. The seller should consult a qualified tax professional.
Can I buy the home from a grandparent or sibling?
Potentially. The lender must confirm that the relationship qualifies under the selected program.
Can the seller stay in the home after closing?
Possibly, but continued occupancy must be disclosed and may affect mortgage, insurance, legal, and occupancy requirements.
Can I use gifted equity for an investment property?
Some programs restrict gifts on investment-property transactions. Ask the mortgage team to evaluate the intended occupancy and available options.
Does gifted equity replace mortgage qualification?
No. The buyer must still meet the lender’s credit, income, debt, employment, asset, property, and program requirements.
Plan the Family Sale Before Signing
A gift of equity can help transfer a home within a family and reduce the buyer’s upfront financial burden. It can also create appraisal, tax, title, occupancy, and documentation questions that require careful planning.
The strongest approach is to involve the mortgage, legal, tax, title, and real estate professionals before deciding on the final price and gift amount.
If you are considering buying a home from a family member, contact the Thomas Faille Mortgage Team to review your mortgage options and determine how a gift of equity may fit into the transaction.
This article is for general educational purposes only and does not constitute legal, tax, accounting, estate-planning, or financial advice. It is not a commitment to lend or a guarantee of approval. Mortgage guidelines, tax laws, property values, and individual circumstances change. Consult qualified mortgage, legal, tax, appraisal, title, and real estate professionals regarding your transaction.
