A real estate transaction between family members can be complicated, but it can also help lucky homebuyers fulfill their dreams of home ownership. Is there just not enough cash saved for a down payment? If so, a gift of equity could help smooth the way for the sale or purchase. This can be achieved simply by providing the buyer with the money to put down on the home, which then comes back to you after closing.
Understanding the rules and processes of a gift of equity can help you complete the transaction and both parties can come out ahead. Here’s what you need to know.
A gift of equity takes place when a seller decides to sell a home and gift part of the sales price back to the buyer. If a family member wants to sell a home to another family member in this fashion, this can help a lot if the buyer doesn’t have money saved up for a down payment.
An equity gift can be for any amount. In some cases, a parent or grandparent may wish to sell a home but allow the home equity to serve as a gift to their descendants. If the amount of gifted equity is equal to or greater than 20% of the purchase price of the home, this can help the buyer get a better deal on their mortgage.
Lenders are required by federal law to make a good-faith determination that a borrower has the ability to repay the mortgage before approving a loan. This requirement is enforced under the CFPB’s Ability-to-Repay/Qualified Mortgage Rule under Regulation Z.
Credit score is a primary eligibility factor. Most lenders require a minimum score of 620 for conventional loans. FHA loans may accept scores as low as 500 with 10% down or 580 with 3.5% down. VA loans have no official minimum, but many lenders use 620 as a floor.
Debt-to-Income (DTI) ratio is also a key eligibility metric. Most lenders prefer a DTI of 43% or lower, while conventional loans may allow up to 50% with compensating factors. VA and USDA loans have their own DTI thresholds.
Lenders typically require at least two years of stable employment history in the same field, and income must be expected to continue for at least 2 more years to be counted.
Down payment requirements vary by loan type. Conventional loans typically require 3–20%, FHA loans require 3.5% for borrowers with scores of 580 or higher, and VA and USDA loans may require no down payment. Loans with less than 20% down generally require Private Mortgage Insurance (PMI) for conventional loans or equivalent insurance premiums for government-backed loans.
A gift letter is needed to affirm a gift of cash is being made to provide a down payment for a homebuyer. Similarly, a gift of equity requires its own letter plus a few added layers of security. A gift of equity letter assures the lender that the gift is not a loan and that there is no expectation for the homebuyer to repay the gift at any time. A gift of equity letter should list the following:
An additional final confirmation from both parties will be required before closing, This is usually referred to as a “settlement” letter, and will note the gift for the transaction.
Lenders must provide a Loan Estimate within three business days of receiving a mortgage application, and a Closing Disclosure at least three business days before closing. Both documents are required by federal law under the TILA-RESPA Integrated Disclosure Rule.
Core closing documents include the Promissory Note, which is the legal commitment to repay, the Mortgage, Deed of Trust, or other Security Instrument that pledges the property as collateral, the Closing Disclosure showing final loan terms and costs, the Initial Escrow Disclosure, and for refinances, a Right to Cancel form.
Title insurance is required by every lender, and a title search must confirm the property is free from liens, unpaid taxes, or encumbrances before closing can proceed.
Borrowers must provide proof of homeowners insurance before closing because lenders require this to protect the collateral asset.
The closing process itself, where loan documents are signed, funds are disbursed, and legal ownership is transferred, typically takes 30–60 days from application to close. Specific procedures vary by state and local law.
Technically, the trigger for a gift tax is any gift of cash, real estate equity, or other assets with a value in excess of the $19,000 annual exclusion amount per recipient. Many people get around this by making multiple gifts. For example, your mother could gift you $19,000 in equity, and your father could do the same, and then both of your parents could also make gifts of equity to your spouse, resulting in $76,000 in real estate equity that can be applied to the market sales price. Additionally when the annual gift amount is exceeded the tax free lifetime gift allowable can be tapped.
As a buyer and recipient of the gift, you wouldn’t be liable for the gift tax. That’s because the gift tax is paid by the giver. Additionally, they can give gifts of $19,000 per year per recipient up to a lifetime exemption of $15 million per individual. Check with your accountant or tax professional if you are worried about tax implications causing problems for your parents or grandparents who are helping you buy their home.
The positives of getting a gift of equity when buying a home are many. The main thing is that you’ll be starting out your home mortgage owing less than you would if you had to finance the entire value of the home or if you had to come up with a bunch of cash.
If you are buying the home from your parents, for example, they can gift you an additional $19,000 per year (up to $76,000 per year if you have two parents and they each give to both yourself and a spouse) which you can use to make mortgage payments and build up equity in your new home even more quickly.
There’s a possibility of seller’s remorse, which can cause family friction and division. This is especially true if parents sell a family home to one child and other children feel left out. Make sure all matters are fully discussed and everything is done correctly and is in writing to help avoid issues in the future.
Additionally the sales price must be supported by an appraisal. Inflating the sales price in order to provide the gift of equity won’t work unless the home appraises at or above the sales price.
If the rules and processes for a gift of equity are followed, it can be a great way to buy your first home. Just make sure it’s the right move before you buy from family, because that’s where things can always get tricky.
At Sammamish Mortgage, our loan officers can help you find out if a gift of equity is the best path forward into your new home.
Sammamish Mortgage has been in business since 1992, and has assisted many homebuyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help you get preapproved. We offer multiple mortgage programs with flexible qualification criteria to borrowers across the Pacific Northwest, including our Diamond Homebuyer Program, Cash Buyer Program, and Bridge Loans. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, contact us if you’re ready to get pre-approved for a mortgage.
A gift of equity is when a home seller agrees to sell the property for less than its market value and credits part of their equity to the buyer. It is often used in family real estate transactions to help with a down payment or reduce the amount financed.
A gift of equity is commonly given by a family member, such as a parent or grandparent, to a related buyer. Lender rules may vary, so the relationship between buyer and seller should be confirmed early in the process.
The gifted equity can count toward the buyer’s down payment because it reduces the difference between the home’s value and the loan amount. This can make it easier to qualify for financing without bringing as much cash to closing.
Yes. Lenders typically require a gift of equity letter stating the seller’s name, address, relationship to the buyer, the appraised value, the sale price, the gift amount, the date of the gift, and that no repayment is expected.
A gift of equity letter should include the seller’s name and address, the relationship to the buyer, the property’s appraised value, the agreed sale price, the gift amount, the date of the gift, a statement that it is not a loan, and signatures from the seller and borrower.
Yes. If the gifted equity is large enough to put the buyer at 20% equity or more, it may help the buyer avoid private mortgage insurance on a conventional loan.
The buyer generally does not pay gift tax on a gift of equity. Gift tax rules usually apply to the person making the gift, and tax questions should be reviewed with a qualified tax professional.
Yes. The lender usually requires an appraisal to support the property value and confirm that the transaction terms are valid. A higher sale price cannot simply be assigned without appraisal support.
A gift of equity can reduce the buyer’s loan amount, lower cash needed at closing, improve loan options, help avoid PMI if enough equity is gifted, and make monthly payments more affordable.
The main risks include family disagreements, concerns about fairness among relatives, and seller’s remorse. Clear documentation, open communication, and proper appraisal support can help reduce problems later.
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