A gift of equity is when a family member sells you their home for less than it's worth and gives you the difference as a credit toward your purchase. If your mom's house appraises at $300,000 and she agrees to give you $40,000 of her equity, that $40,000 shows up on the closing statement as a credit, and FHA and Fannie Mae both let it count toward your down payment and closing costs. It isn't cash, the appraisal still has to support the value, and the seller has to be someone the loan program allows to give it.
How a gift of equity works
Fannie Mae describes it simply: a gift provided by the seller to the buyer, representing part of the seller's equity, transferred to the buyer as a credit in the transaction (Fannie Mae Selling Guide B3-4.3-05). In practice it usually looks like this:
- You and the family member agree on the price and the size of the gift.
- The sales contract is written at the agreed price, and the gift of equity is written into the deal so the title company can show it.
- The appraisal confirms the home's value.
- At closing, the gift appears as a credit to you on the settlement statement, which reduces the cash you bring.
- The seller's existing mortgage, if there is one, gets paid off from the sale. The seller receives whatever is left after the payoff, their costs and the gift.
That last step is where families get surprised. A gift of equity can't be bigger than the equity the seller actually has. If the house still has a large mortgage on it, there may not be much equity to give.
The rules by layer
Each loan program has its own rules about who can give equity and how it's documented. Here's how FHA and Fannie Mae handle it.
FHA (HUD rule)
- Who can give it. Only family members may provide equity credit as a gift on property being sold to other family members (HUD 4000.1 II.A.4.d.iii(F)(4)(a)).
- Who counts as family. HUD's list includes a child, parent or grandparent (including step and foster), spouse or domestic partner, adopted or foster child, brother or sister (including step), uncle or aunt, and in-laws (HUD 4000.1 II.A.1.a.i(E), Family Member definition).
- Documentation. A gift letter signed and dated by the donor and the borrower with the donor's name, address, phone number, relationship, the dollar amount, and a statement that no repayment is required (HUD 4000.1 II.A.4.d.iii(F)(4)(b)).
- Family sales and loan-to-value. FHA limits sales between family members or business associates to 85% loan-to-value on a principal residence. That limit can be exceeded when you're buying a family member's principal residence, or a family member's property you've rented for at least six months before the contract, with a lease or other proof (HUD 4000.1 II.A.2.b.ii(A)). So buying your parents' home they live in can work with FHA's normal financing, while buying a rental your uncle owns usually can't, unless you've been the tenant.
The gift of equity standards above (II.A.4.d) read the same in Update 17 of HUD's handbook, the version in effect today, and in Update 18, issued Aug 12, 2026, which lenders must use by Nov 10, 2026. More on FHA basics in how FHA loans work.
Conventional (Fannie Mae rule)
- Where it's allowed. Principal residence and second home purchases (Fannie Mae Selling Guide B3-4.3-05).
- What it can pay. All or part of the down payment and closing costs, including prepaid items. It can't count toward reserves (B3-4.3-05).
- Who can give it. The same acceptable donors as a cash gift: a relative by blood, marriage, adoption or legal guardianship, or a non-relative with a familial relationship such as a domestic partner, fiancé, former relative, or someone with a long-standing familial-like or mentorship relationship (B3-4.3-04).
- Not an interested party contribution. When an acceptable donor gives equity, Fannie Mae doesn't treat the seller as an interested party, so the gift isn't capped by its seller contribution limits (B3-4.3-05).
- Your own funds. On a one-unit principal residence, Fannie Mae doesn't require a minimum contribution from your own money when there's a gift. On two to four units and second homes above 80% loan-to-value, a minimum borrower contribution applies (B3-4.3-04).
- Documentation. A signed gift letter and the settlement statement listing the gift of equity (B3-4.3-05).
VA, USDA and other programs
VA and USDA have their own rules on gifts and family sales, and down payment assistance programs add theirs. I check the current guide for whichever program fits before we write the contract.
Lender layer
We follow the agency guidelines above. The appraisal, underwriting and title still have to clear, and nothing here is a promise of approval.
A price cut is not a gift of equity
If a seller who isn't related to you agrees to drop the price, that's just a lower price. If a builder or a seller connected to the real estate agent wants to help, that falls under seller concessions, which have their own limits. A gift of equity only works when the seller is an allowed donor under the program's rules.
The appraisal still matters
The gift is measured against value, so the value has to be supported. If the appraisal comes in lower than the family expected, the room for the gift shrinks with it. Lenders base the loan on the lower of the price or the appraised value, so don't plan a gift around a number nobody has verified yet. See how the appraisal works.
What equity can't pay for
A gift of equity is a credit, not cash in your hand. Depending on how big it is, you may still need money for:
- The appraisal and other fees paid before closing.
- Earnest money, if the contract calls for it.
- Reserves, if your loan requires them. Fannie Mae doesn't let a gift of equity count toward reserves.
- Anything the gift doesn't fully cover once the down payment and closing costs are added up.
A family member can also give you a separate cash gift. Those follow the gift funds rules, with their own paper trail. Run the full picture through your cash to close before you sign.
Taxes are a question for a tax pro
The mortgage file doesn't decide anyone's tax reporting. The IRS publishes an annual gift exclusion per recipient, $19,000 for 2026 according to its gift tax FAQ (updated December 2025), and gifts above that can require the giver to file Form 709. Whether any tax is owed, and how the sale affects the seller's capital gains and your tax basis, are questions for a CPA or tax preparer. Have the seller talk to one before the contract is signed.
Fictional example
This example is made up to show how the pieces fit.
Elena's father in Benbrook is moving into a smaller place and wants to sell her the house he lives in. It appraises at $280,000, and he still owes $60,000 on it. He agrees to sell at $280,000 with a $50,000 gift of equity.
- Because she's buying her father's principal residence, FHA's 85% family-sale limit doesn't apply, and the $50,000 gift more than covers FHA's minimum required investment.
- At closing, his $60,000 loan is paid off from the sale, the $50,000 gift is credited to Elena, and he receives the rest after his costs.
- Elena still pays for the appraisal up front, and any closing costs the gift doesn't cover.
- Her father talks to his tax preparer about the gift and the sale.
If the house had been a rental he owned and Elena had never lived there, FHA's 85% limit would apply unless she'd been his tenant for at least six months.
Common mistakes
- Not saying the seller is family. Tell your lender up front. The relationship shows in title and appraisal records anyway, and the rules change with it.
- Planning a gift bigger than the equity. The seller's payoff comes first.
- Thinking it skips the appraisal. It doesn't. No supported value, no measurable gift.
- Using the gift as a side payment. The gift can't also be money that flows back to the seller.
- Waiting on tax advice. Get it before the contract, not after closing.
What to have ready
- The seller's relationship to you and whether the home is their principal residence.
- Whether you've rented the home from them, with a lease and proof of payments.
- A rough idea of the home's value and the seller's current payoff.
- The size of the gift the family has in mind and how much cash the seller needs from the sale.
- Your income, debts and savings, since you still have to qualify for the loan.
Next step
Buying a home from a parent, grandparent or other relative? Let me map out the gift of equity, the loan program and the cash you'll need before anyone signs a contract. Book a call, or start an application when you're ready.
Related questions
Sources
Links checked Oct 21, 2026.
- HUD Handbook 4000.1, II.A.4.d.iii(F)(4) Standards for Gifts of Equity, II.A.2.b.ii(A) LTV Limitations Based on Identities of Interest, II.A.1.a.i(E) Family Member definition (Update 17, issued Nov 26, 2025, the version in effect today; Update 18, issued Aug 12, 2026, may be adopted now and must be used by Nov 10, 2026, and does not change the rules cited here): https://www.hud.gov/sites/default/files/OCHCO/documents/40001-hsgh-Update-17.pdf
- Fannie Mae Selling Guide B3-4.3-05, Gifts of Equity (topic dated Oct 7, 2020; guide published Oct 7, 2026): https://selling-guide.fanniemae.com/sel/b3-4.3-05/gifts-equity
- Fannie Mae Selling Guide B3-4.3-04, Personal Gifts (topic dated Feb 4, 2026; guide published Oct 7, 2026): https://selling-guide.fanniemae.com/sel/b3-4.3-04/personal-gifts
- IRS, Frequently Asked Questions on Gift Taxes (annual exclusion table updated December 2025): https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
About the author: McKade Lively, NMLS 2704474, American Pacific Mortgage Corporation dba True North Home Loans, NMLS 1850.
Equal Housing Opportunity.
Last reviewed: Oct 2026