“…the share of first-time homebuyers that received financial help from family members is sitting at 31%” – Benjamin Tal and Katherine Judge [SOURCE]
One way families help the next generation buy a home is through gifted equity.
This allows parents or relatives to transfer wealth while making homeownership easier for their loved ones. If you’re thinking about giving or receiving a mortgage down payment gift, you need to understand the rules and lender requirements.
What is Gifted Equity?
Gifted equity is when a family member gives part of their home’s value to help someone else buy the property.
Instead of requiring the buyer to bring cash for a down payment, the seller transfers part of the home’s value as a gift. This can help family members afford a home without needing a large amount of cash upfront.
How It Works in Home Financing
Gifted equity is commonly used when parents sell their home to their children. Instead of selling at a discount, they sell at full market value and give part of the home’s equity as a gift. This helps the buyer meet mortgage requirements without needing extra cash for a down payment.
Who Can Give a Gift of Equity?
Most lenders require that the person giving the gift be an immediate family member. This includes:
- Parents
- Grandparents
- Siblings
- Children
Lenders want to ensure the gift is legitimate and that the giftor does not expect repayment.
Key Benefits of Using Gifted Equity
- Makes homeownership easier – Reduces the need for a large cash down payment.
- Keeps property in the family – Helps transfer wealth between generations.
- May reduce loan costs – A larger down payment can mean better loan terms and lower monthly payments.
Gifted Down Payment and Gifted Equity Rules
Not all lenders allow gifted down payments, and the ones that do, typically have rules that you need to follow.
Common Lender Guidelines for Gifted Down Payment and Equity
- The funds must come from immediate family members.
- The gift must be a true gift, meaning no repayment is required.
- Most lenders require the property to be a primary residence but some can do a rental property.
- Many lenders allow gifted equity in family-to-family sales.
- Some lenders require a portion of the down payment to come from the buyer’s own funds.
What You Need to Prove for the Gift
- Gift Letter – The lender will require a signed letter stating:
- The amount of the gift
- The relationship between the giftor and giftee
- A statement confirming repayment is not required
- Bank Statement – The buyer may need to show the gift being deposited into their account.
- Property Appraisal – Lenders require an appraisal to confirm the home’s market value if the equity is being gifted.
Case Study: Using Gifted Equity in a Property Sale
Selling a Home to Family Members with Gifted Equity
A common situation is when parents want to sell their home to their children. Many think they can sell the home at a reduced price to avoid a down payment. However, lenders still require a minimum down payment based on the home’s market value.
Loan-to-Value (LTV) Considerations
Lenders follow loan-to-value (LTV) guidelines, meaning:
- Conventional loans require a 20% down payment.
- Insured mortgages require 5% on the first $500,000 and 10% thereafter.
- Lenders base the loan amount on the lower of the purchase price or appraised value.
Why Selling Below Market Value Doesn’t Work
For example, if a home is worth $500,000 but the parents sell it for $400,000, the child still needs to come up with $100,000 (20%) for a conventional mortgage. Instead, the parents should sell at full market value and use gifted equity to cover the down payment.
Common Myths About Gifted Equity
“A Gift of Equity Means No Down Payment is Needed”
Lenders still require a down payment based on market value. Selling below market price does not eliminate this requirement.
“All Lenders Accept Gifted Down Payments”
Some lenders do not allow gifted down payments, especially for investment properties. Borrowers should check lender guidelines before proceeding.
Final Thoughts: Is Gifted Equity Right for You?
Gifted equity can be a great way for families to transfer wealth and help loved ones buy a home. However, it’s important to follow lender rules and structure the sale correctly. If you’re considering gifted equity, consult a mortgage expert to ensure a smooth transaction.