If you’re buying a home from a family member, you may have heard the term gift of equity. A gift of equity can make purchasing a home more affordable by allowing part of the home’s value to count toward your down payment.
What Is a Gift of Equity?
A gift of equity occurs when a family member sells you a home for less than its current market value. The difference between the home’s appraised value and the agreed-upon purchase price is considered the gift of equity.
Example
Let’s say:
- The home appraises for $250,000.
- Your parents agree to sell it to you for $220,000.
The $30,000 difference is the gift of equity.
Depending on the loan program and your qualifications, that equity may be used toward your down payment and, in some cases, closing costs.
Who Can Give a Gift of Equity?
A gift of equity is typically available when purchasing from an eligible family member. Loan program guidelines determine which family relationships qualify, so it’s important to discuss your specific situation with your lender.
What Are the Benefits?
A gift of equity can reduce or even eliminate your down payment, lower the amount of cash needed at closing, and allow you to purchase a home from a family member for less than its market value. In many cases, you’ll also begin homeownership with equity already built into the property.
Are There Any Requirements?
Yes. Most gift of equity transactions require a professional appraisal, a signed gift of equity letter, and documentation showing the agreed-upon purchase price. The transaction must also meet the underwriting requirements of the loan program being used.
Is a Gift of Equity Right for You?
If you’re buying a home from a parent, grandparent, or another eligible family member, a gift of equity may help make homeownership more affordable. Every loan program has different guidelines, so it’s important to understand how they apply to your situation before moving forward.