Most buyers assume a down payment has to come out of savings. When you are buying from a parent, grandparent, sibling or another relative, there is a second option that costs nobody any cash: a gift of equity.

It is one of the most useful tools in residential lending, and one of the least understood. Here is the plain version.

What a gift of equity actually is

Your relative sells you the home for less than it is worth. The difference between the appraised value and the price you actually pay becomes the gift.

A simple example:

  • The home appraises at $400,000
  • Your aunt agrees to sell it to you for $360,000
  • The $40,000 difference is a gift of equity — and it can serve as your 10% down payment

No money moves. Your aunt does not write you a check and you do not need $40,000 in the bank. The gift exists on paper, it shows up on the settlement statement, and the lender counts it toward your down payment and closing costs.

That is the whole idea. The equity your family already built in the home becomes the equity you start with.

This is an illustration only. Figures are estimates based on the information provided and will differ on your transaction.

The rules that decide whether it works

A gift of equity is allowed on most loan types, but each program draws the lines differently. These are the two that come up most often.

FHA loans

  • The gift of equity is permitted only between family members. Seller to buyer, and the relationship has to qualify. A friend, a landlord or a business contact cannot do this.
  • It must be a true gift. No repayment can be required, expected, or quietly understood.
  • You need a signed gift letter containing the donor’s name, address, phone number, their relationship to you, the dollar amount, and an explicit statement that no repayment is required.
  • The lender has to confirm the funds are not coming from an unacceptable source.
  • Where land is involved, you will also need proof the donor owns it and evidence of the title transfer.

FHA guidelines may change, and individual lenders may apply overlays that are stricter than FHA’s minimums.

Conventional loans

  • Allowed on a primary residence and on a second home. Not allowed on an investment property — if you are buying a rental from family, this is not the route.
  • Can be applied to your down payment and your closing costs.
  • Cannot be used for reserves, and cannot come back to you as cash at closing.
  • The donor must be a relative or a related entity — which can include a family business, a trust, or an estate.
  • On a second home above 80% loan-to-value, you may be required to contribute at least 5% from your own funds on top of the gift.
  • A gift letter signed by the donor is required, and the gift of equity has to appear as a credit on the settlement statement.

Fannie Mae and Freddie Mac guidelines may change, and lender overlays may be stricter than agency minimums.

VA and USDA

Both allow gift funds from acceptable donors. In practice the question comes up less often, because qualified borrowers on these programs frequently need no down payment at all. If you are eligible for either, that is worth looking at before anything else. VA and USDA guidelines may change, and lender overlays may be stricter.

What you will need to put together

Short list, and none of it is difficult if you start early:

  1. A signed, dated gift letter from the donor — name, address, phone, relationship, dollar amount, and a clear statement that repayment is not required.
  2. An appraisal. The gift is the gap between appraised value and sale price, so the appraised value has to be established before the number is real.
  3. A settlement statement showing the gift of equity as a credit.
  4. Proof of ownership and title transfer, where land is part of the transaction.
  5. A purchase contract that reflects the agreed sale price, not the market value.

Three things that trip people up

The appraisal decides the gift, not the family. You and your father can agree the house is worth $400,000, but if it appraises at $350,000 the gift shrinks accordingly. Order the appraisal before anyone commits to a number.

It has to be a real gift. A side agreement to pay the money back later — even a handshake one — breaks the rule. Lenders ask directly, and the gift letter is a signed statement.

There may be a tax filing on the donor’s side. A gift above the annual exclusion generally means the donor files a federal gift tax return. That usually does not mean tax is owed, because most people are well under the lifetime exemption, but the return still gets filed. I am not a CPA and this is not tax advice — have the donor talk to theirs before the contract is signed. It is a ten-minute conversation that prevents a bad surprise in April.

Why this matters in Northeast Florida

Family transfers are common here. Parents downsizing out of Mandarin or Orange Park and selling to a grown child. An inherited property in St. Augustine going to one sibling who buys out the others. A grandparent who wants a grandchild in the house rather than on the market.

In all of those, a gift of equity turns a sentimental decision into a financeable one — often with no cash down payment at all, for qualified borrowers.

What to do next

If a family member is thinking about selling you their home, the time to call is before you agree on a price. The sale price, the appraisal and the gift amount all interact, and a few minutes up front saves a renegotiation later.

Send me the basics — who owns it, roughly what it is worth, what you were thinking of paying — and I will tell you what the gift could look like and which loan program fits.

Get a rate quote · Start an application · Call 904-880-6741

Frequently asked questions

Does a gift of equity count as my down payment?

Yes. On most programs the gift of equity can be applied to your down payment and your closing costs. On a conventional loan it cannot be used for reserves or returned to you as cash at closing. Available for qualified borrowers; program guidelines apply.

Who is allowed to give a gift of equity?

On an FHA loan it must be a family member. On a conventional loan the donor must be a relative or a related entity such as a family business, trust or estate. Guidelines may change and lender overlays may be stricter.

Can I use a gift of equity on a rental property?

No. On a conventional loan a gift of equity is not permitted for an investment property purchase. It is allowed on a primary residence and, with conditions, on a second home.

Do I need any of my own money if I receive a gift of equity?

Often not on a primary residence. On a second home above 80% loan-to-value you may be required to contribute at least 5% from your own funds in addition to the gift.

Does the seller pay tax on a gift of equity?

The donor may need to file a federal gift tax return, though tax is frequently not owed because of the lifetime exemption. This is not tax advice — the donor should speak with their own CPA.

How is the gift amount calculated?

It is the difference between the home’s appraised value and the price you actually pay. The appraisal establishes the value, so it needs to be completed before the gift amount is final.

Nathan Young is the founder and president of North Star Mortgage Network, Inc., a Jacksonville mortgage broker serving Florida since 2000. He is a 2025 NAMB Mortgage Broker of the Year.
Nathan Young NMLS #325206 · Company NMLS #356789 · 904-880-6741 · nathan@nsmn.com
12058 San Jose Blvd, Suite 404, Jacksonville, FL 32223
Your Best Interest Is My Principal Concern.

All loans are subject to credit approval. Program guidelines apply and products are available for qualified borrowers. Rates and terms are subject to change. FHA, VA, USDA, Fannie Mae and Freddie Mac guidelines may change, and individual lender overlays may be stricter than agency minimums. Examples shown are estimates based on the information provided and are not a loan commitment. Equal Housing Opportunity.

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