A gift of equity works like this: a relative sells you their home for less than its appraised value, and the difference between the two prices is credited on the lender’s books as your down payment. No money moves for the gifted portion. If your parents’ home appraises at $400,000 and they agree to sell it to you for $320,000, that $80,000 gap is the gift of equity, and it satisfies the lender’s requirement that you have a stake in the property. For buyers with steady income but thin savings, it can be the difference between qualifying and not.
Who Can Give You a Gift of Equity
Lenders limit these transactions to people with a real personal relationship, and the definition depends on the loan program.
For conventional loans, Fannie Mae accepts relatives by blood, marriage, adoption, or legal guardianship, plus a fiancé, domestic partner, former relative such as an ex-spouse, or someone with a documented long-standing close relationship. The donor cannot have a financial stake in the sale as a builder, developer, or real estate agent.1Fannie Mae. Personal Gifts
FHA loans are stricter. Only a family member qualifies, which HUD defines to include parents, children, grandparents (including step and foster relationships), siblings, in-laws, aunts, uncles, spouses, and domestic partners.2U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook – Allowable Mortgage Parameters A close friend or mentor who might work under conventional rules will not work here.
One boundary to know before you go further: gifts of equity apply to primary residences and second homes. Investment properties and multi-unit rentals are generally disqualified or face steep additional requirements.
What Your Loan Program Allows
The program you choose changes how far the gift can stretch and what conditions you have to clear.
Conventional Loans
On a conventional loan, a gift of equity can cover all of your down payment and closing costs, including prepaid items like homeowner’s insurance and property taxes collected at closing. It cannot count toward cash reserves a lender may require you to hold after closing. A useful quirk: Fannie Mae does not treat a family-member seller as an “interested party,” so the gift is not subject to the contribution limits that apply to credits from builders or agents.3Fannie Mae. Gifts of Equity
FHA Loans
FHA adds a wrinkle. Buying from a relative is classified as an “identity-of-interest” sale, which normally caps your loan-to-value ratio at 85%, meaning you would need 15% equity rather than the standard 3.5%. That cap disappears if you are buying the family member’s primary residence, or if you have been renting the property for at least six months before signing the purchase contract. In either case, you return to the standard 96.5% maximum LTV for borrowers with credit scores at or above 580.2U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook – Allowable Mortgage Parameters
VA Loans
Veterans with full entitlement already get VA financing with no down payment, so a gift of equity plays a smaller role. The VA does accept gift letters for funds from someone not involved in the sale, but the program is built around the guaranty replacing the down payment.4Veterans Benefits Administration. VA Home Loan Guaranty Buyers Guide Talk to your lender early if you are a veteran buying from a relative, because VA appraisal and documentation rules may treat the below-market price differently than conventional or FHA loans.
The PMI Benefit
On a conventional loan, if the gift puts you at 20% equity or better, you skip private mortgage insurance entirely.5Consumer Financial Protection Bureau. What Is Private Mortgage Insurance That savings can be substantial over the life of the loan. FHA loans have their own mortgage insurance premiums that work differently and cannot be avoided the same way through a larger down payment.
Paperwork the Lender Will Require
The transaction starts with a professional appraisal by a licensed appraiser to establish fair market value. That number anchors everything: how much equity is being gifted, your loan-to-value ratio, and the lender’s collateral analysis.
The purchase agreement then shows a sales price below the appraised value. The gap is the gift. With a $400,000 appraisal and a $320,000 purchase price, the gift of equity is $80,000, which represents a 20% down payment.
You also need a gift of equity letter, signed by both parties, containing:
- The donor’s legal relationship to you, confirming eligibility under the loan program.
- The exact gift amount, matching the difference between appraised value and sales price.
- An explicit statement that the equity is a gift, not a loan, with no expectation of repayment.3Fannie Mae. Gifts of Equity
- Signatures from both the seller (donor) and the buyer (recipient).
Vague language about repayment is one of the most common reasons a gift-of-equity file stalls in underwriting. Most lenders provide a template; use it.
How the Closing Works
At closing, the gift of equity appears as a line-item credit on the Closing Disclosure, applied to your down payment and closing costs. For many buyers, this brings cash-to-close to zero or near it.3Fannie Mae. Gifts of Equity No money changes hands for the gifted portion. The title company or escrow agent handles it in the settlement math.
The seller receives net proceeds based on the reduced sales price, minus any existing mortgage payoff and closing costs. The lender records its lien against the full appraised value. One practical constraint: the seller must actually have enough equity to cover the gift. If an existing mortgage balance exceeds the reduced sales price, there is no equity available to give, and the deal will not work without the seller bringing cash to closing.
Gift Tax Rules for the Donor
The IRS treats a gift of equity like any other gift of value. For 2026, the annual gift tax exclusion is $19,000 per recipient.6Internal Revenue Service. Whats New – Estate and Gift Tax A married couple who agree to split the gift can double that to $38,000 to a single recipient. Most gifts of equity blow past those thresholds. An $80,000 gift exceeds even the married-couple limit by $42,000.
When a gift tops the annual exclusion, the donor files IRS Form 709 for the year of the transfer.7Internal Revenue Service. Instructions for Form 709 Filing does not mean tax is owed. The excess is tracked against the donor’s lifetime exemption, which for 2026 is $15,000,000, raised from $13.99 million in 2025 by the One, Big, Beautiful Bill signed into law on July 4, 2025.6Internal Revenue Service. Whats New – Estate and Gift Tax Only after that entire lifetime amount is used up does any gift tax come due, at rates from 18% to 40%.
Almost no donor actually pays gift tax on a gift of equity. Skipping the Form 709 filing, though, is a mistake. The IRS can assess penalties, and the omission can surface years later during estate settlement.
Capital Gains for the Seller
A gift-of-equity sale can trigger capital gains tax. The IRS still treats it as a home sale, even at a discounted price to family.
The main protection is the primary-residence exclusion: if the seller owned and lived in the home as a primary residence for at least two of the five years before the sale, up to $250,000 of gain is excluded from income, or $500,000 for married couples filing jointly.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence For most family sellers, that covers the entire gain and nothing is owed.
The picture changes if the property was a rental, investment, or second home the seller never lived in. Without the primary-residence exclusion, any gain above adjusted basis is taxable, and depreciation deductions from rental years will have reduced the basis further, enlarging the taxable gain. A tax professional should weigh in before the sale price is set.
Your Tax Basis as the Buyer
Your basis in the home, the figure that determines your capital gains when you eventually sell, follows a special rule for part-sale, part-gift transactions. Your basis is the greater of what you actually paid or the seller’s adjusted basis at the time of the transfer.9eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale
In practice, the purchase price is usually the higher number. If your parents bought the home 20 years ago for $150,000 and you buy it today for $320,000, your basis is $320,000. Not the $400,000 appraised value, and not your parents’ $150,000 original cost. When you eventually sell, your gain is measured from $320,000. If you sell as your own primary residence after meeting the two-year ownership and use requirement, the same Section 121 exclusion of $250,000 or $500,000 applies to your gain.