A gift of equity lets a family member sell you their home for less than it’s worth and use the difference to help cover your down payment or closing costs. Instead of giving you cash, the seller gives up part of the home’s value.
Key takeaways
- A gift of equity can reduce your upfront costs. It may cover some or all of your down payment and closing costs, depending on your loan.
- Not every seller qualifies. Conventional and FHA loans have different rules about who can give a gift of equity.
- The contract and appraisal matter. How the gift is documented and what the home appraises for can affect how much money you’ll need at closing.
Mortgage-program rules below are as of November 2026. Individual lenders may have additional requirements.
How a gift of equity differs from a cash gift
A cash gift is money someone gives you to help buy a home. A gift of equity is a discount on the home’s value that your lender agrees to count toward the purchase.
Instead of transferring money, the seller provides a credit that appears in your closing paperwork. Both types of gifts can help with your down payment and closing costs, but there’s one important difference.
Fannie Mae allows eligible cash gifts to count toward financial reserves, which are savings your lender may require you to keep after closing. A gift of equity cannot count toward those reserves.
Under Fannie Mae’s gift rules, a gift of equity from an eligible seller also isn’t subject to the usual limits on seller contributions, provided the applicable requirements are met.
Who can give you a gift of equity?
Parents, grandparents and other family members are common gift-of-equity sellers. Some mortgage programs also allow gifts from people who aren’t legally related to you but have a close, family-like relationship.
| Seller’s relationship to you | Conventional loans | FHA loans |
| Parent, grandparent, sibling or spouse | Generally eligible | Eligible |
| Other relatives, such as aunts, uncles or cousins | Generally eligible | Only certain family relationships qualify |
| Domestic partner or fiancé(e) | May qualify | Domestic partners qualify; engagement alone isn’t enough |
| Non-relative with a close, family-like relationship | May qualify | Not eligible solely on that basis |
FHA defines eligible family members more narrowly than conventional loan programs. Its list includes parents, grandparents, siblings, aunts, uncles, spouses, domestic partners and certain in-laws, step-relatives, foster relatives and adopted children. Cousins aren’t included.
Fannie Mae also recognizes certain non-relatives, including domestic partners, engaged couples and people with long-standing family-like or mentorship relationships.
Freddie Mac accepts gifts of equity from a trust established by a related person or that person’s estate, as described in its December 2022 policy update. Since July 1, 2026, it has also allowed gifts from businesses owned by eligible related persons, subject to the requirements in Bulletin 2026-9.
The property matters, too:
- Conventional loans: Gifts of equity are permitted for primary residences and second homes, but not investment properties.
- FHA loans: The home must be purchased as your primary residence, and the gift must meet FHA’s family-member rules.
These are agency guidelines, not a guarantee that every lender will accept the arrangement. Check with your loan advisor before counting on the gift.
How much of your own money will you need?
You may not need to use your own money for the down payment if the gift is large enough and your loan meets the program’s requirements.
For example, Fannie Mae doesn’t require buyers to contribute their own funds toward the down payment when purchasing a single-unit primary residence with an eligible gift. Different rules can apply to second homes and properties with two to four units. When the loan covers more than 80% of the property’s value, a contribution from your own funds may be required.
However, a gift of equity doesn’t automatically cover everything. You may still need money for closing costs beyond the gift, or financial reserves required by your lender. You’ll also need to qualify for the mortgage based on your income, credit and other financial details.
FHA permits eligible gifts of equity to help meet the buyer’s required investment, subject to its family-sale rules.
How lenders calculate a gift of equity
The amount your family agrees to give matters, but so does the home’s appraised value. For a conventional purchase loan, Fannie Mae generally calculates the loan-to-value ratio, or LTV, using the lower of the contract sales price or the appraised value. LTV measures how much you’re borrowing compared with the value the lender uses.
A gift of equity example
Suppose your parents own a home worth $400,000 and want to give you $80,000 in equity.
The purchase is set up as follows:
- Contract sales price: $400,000
- Gift of equity: $80,000
- Mortgage amount: $320,000
- Appraised value: $400,000
The $80,000 gift is credited toward the purchase, leaving $320,000 to be financed.
Because the loan is $320,000 and the home appraises at $400,000, the LTV is 80%.
In this example, the gift covers the full difference between the loan and the home’s value. You may not need additional money for the down payment, although other costs may still apply.
This is a simplified example for educational purposes, not an offer of financing. Actual loan amounts, required funds and eligibility depend on the transaction.
What happens if the appraisal comes in low?
Now suppose the same home appraises at $380,000 instead of $400,000. The contract still includes an $80,000 gift, but the lender is working with a lower property value.
| Appraisal matches | Appraisal comes in low | |
| Contract price | $400,000 | $400,000 |
| Gift of equity | $80,000 | $80,000 |
| Appraised value | $400,000 | $380,000 |
| Loan amount | $320,000 | $320,000 |
| LTV | 80% | 84.2% |
On a conventional loan, borrowing more than 80% of the home’s value generally means mortgage insurance may be required. To return to 80% LTV with the lower appraisal, the loan would need to decrease to $304,000. That could mean finding another $16,000 from an eligible source or discussing changes to the transaction with the lender and seller.
The takeaway: Even a large gift of equity doesn’t guarantee you’ll avoid mortgage insurance or additional cash requirements. The appraisal can change your financing.
FHA has additional rules for family sales
FHA treats sales between family members as identity-of-interest transactions. Put simply, this means the buyer and seller already have a relationship.
These transactions generally have an 85% LTV limit, but there are important exceptions.
The limit may be exceeded if you’re buying:
- A family member’s primary residence and will live there yourself.
- A property owned by a family member that you’ve rented for at least six months immediately before signing the sales contract, with proof of your rental history.
If neither exception applies, the 85% limit may affect how much you can borrow. These exceptions are outlined in HUD’s FHA Single Family Housing Policy Handbook. Ask your loan advisor which rules apply before agreeing on the purchase price.
Settle the contract price before you sign
How you write the purchase contract matters. Before anyone signs, tell your lender that the seller plans to provide a gift of equity. Your loan advisor can explain how the sale price and gift should appear in the contract.
For example, if your parents plan to accept $320,000 for a home worth $400,000, the paperwork needs to clearly document the agreed $80,000 gift.
If the contract simply lists a discounted price of $320,000 without documenting the gift, your lender may not be able to count the discount as a gift of equity without additional paperwork or a contract amendment. That can have a significant impact.
If the lender treats $320,000 as the purchase price with no documented gift, keeping the loan at 80% LTV would mean borrowing $256,000 and covering the remaining $64,000 with eligible funds.
That isn’t necessarily what will happen. Your lender may be able to correct the documentation, and other loan structures may be available. But it shows why getting the paperwork right matters.
Fannie Mae’s gift-of-equity rules require a signed gift letter and settlement statement showing the gift. Make sure the purchase contract, gift letter and closing paperwork all agree on the gift amount. The best time to resolve differences is before signing, not just before closing.
What paperwork do you need for a gift of equity?
Your lender will typically ask for four things:
- A signed gift letter. It identifies the donor, their relationship to you, the gift amount and confirms that no repayment is expected. It also includes contact information. FHA requires both the buyer and donor to sign and date the letter.
- A purchase contract. It should document the gift as your lender instructs.
- A home appraisal. Your lender will generally require one to confirm the property’s value.
- Closing paperwork showing the gift. The settlement statement must record the gift of equity.
Unlike a cash gift, a gift of equity generally doesn’t require bank statements proving a transfer of gift money. The credit comes from the seller’s equity, not a separate cash payment.
Fannie Mae’s standard appraisal-waiver options exclude gift-of-equity transactions, so buyers should plan for an appraisal. Your lender may request additional documents depending on the transaction.
Are there taxes on a gift of equity?
The seller may have gift-tax reporting requirements, but that doesn’t automatically mean they’ll owe gift tax.
For 2026, the IRS annual gift exclusion is $19,000 per recipient, per donor. A larger gift generally requires the donor to file IRS Form 709, although exceptions can apply.The federal lifetime gift and estate tax exclusion is $15 million per individual in 2026. Gifts above the annual exclusion generally count toward that lifetime amount rather than immediately creating a tax bill.
The sale may also have capital-gains tax consequences. As the IRS explains in Publication 544, selling a home below market value with the intent to make a gift may count as partly a sale and partly a gift.
That can affect the seller’s taxes and the buyer’s tax basis, which helps determine taxable gains if the buyer sells the home later. In some cases, the buyer takes on part of the seller’s original cost basis, as explained in IRS Publication 551. Both sides should consult a tax professional before completing the sale.
Next step: Buying a home from family?
A gift of equity may help you buy a family member’s home with less cash upfront, but it’s important to confirm the details before signing a purchase contract.
Have three numbers ready: the home’s estimated value, the price your family wants to accept and how much the seller still owes on the property.
Your loan advisor can help you understand how those numbers and the gift amount may affect your purchase.
Tomo Mortgage, LLC, NMLS ID 2059741, Equal Housing Lender
Frequently asked questions
Do you have to pay back a gift of equity?
No. A gift of equity must come with no expectation of repayment, and the gift letter confirms this in writing.
If the seller expects repayment, it isn’t a gift. Any repayment arrangement must be disclosed to your lender.
Can you use a gift of equity on a second home or investment property?
Fannie Mae and Freddie Mac allow eligible gifts of equity when buying a primary residence or second home, but not an investment property.
FHA loans are for primary residences, so you can’t use an FHA gift of equity to purchase a vacation home or investment property.