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Having generous loved ones is an advantage when buying a property. A person in your life can assist you financially to lower or avoid putting any money down and qualify for a mortgage more quickly. Most donors give money, but some prefer to bestow equity. Discover how a gift of equity can help you afford a house and the dangers it entails.
A gift of equity is a credit a seller gives you when they sell their house at a price below its fair market value. Only some sellers qualify to contribute equity to buyers. The criteria for acceptable donors depend on the underlying guidelines of a home loan program.
To Freddie Mac, a donor must be a relative of yours or an estate or a trust established by a family member. The government-sponsored enterprise accepts equity donations as a source of funds to purchase a primary residence or a second home.
To Fannie Mae, a qualified donor is any person related to you by blood, marriage, legal guardianship or adoption. A nonrelative who shares a familial relationship with you, such as a domestic partner, a former relative or a longtime mentor, can also gift their home’s equity.
As a general rule, anyone who has a financial interest in the property sale or has any affiliation with an interested party is ineligible to donate equity. Builders, developers and real estate agents are prime examples of unqualified gift givers.
The donation applies to the down payment, allowing you to borrow less to finance the house and have potentially significant equity when you move in. It can reduce your closing costs by lowering the final sale price. If the discount is at least 20% of the house’s appraised value, you can bypass the private mortgage insurance (PMI) when taking out a conventional loan.
A gift of equity works without any cash changing hands. The lender requires only a formal letter signed by the giver and the recipient. This document confirms that the gift is a donation, not a loan.
The equity gift letter must state the following:
The donor can choose to make an equity contribution above the minimum to satisfy the mortgage program’s down payment requirement.
Suppose you want to buy your parents’ house, valued at $500,000, and your preferred mortgage requires you to put down at least 3%. If your folks agreed to sell the property for $400,000, the gift of equity would be $100,000 or 20% of the appraised value. With that donation amount, you’d only need to borrow $400,000 to complete the sale and avoid PMI altogether.
An equity donation is a considerable benefit when buying a house, but it’s not without drawbacks. Remember the following before taking this route.
This deal limits your choice, for the equity and the house are inseparable. Accepting the donation means agreeing not to use the funds to buy a different property. If you prefer to live elsewhere, you’ll have to pull the trigger on the purchase, resell the house at a later date and use the proceeds to get your dream home.
The cost basis serves as the baseline the IRS uses to determine your capital gain. The equity contribution renders the purchase prices discounted by default, increasing your potential taxable profit when you sell your house.
Entering into a secret agreement to repay the equity hides the truth that the gift is, in fact, a loan. Misleading the lender constitutes mortgage fraud. Many mortgages are federally insured, so the United States government may aggressively prosecute offenders.
In the U.S., the donor must file a federal gift tax return using Form 709. The document is mandatory even if the gift is below the annual exclusion per donee, which is $19,000 in 2026. The giver may need to file even if the donation is below the threshold.
Here are the answers to common questions about gifts when taking out a mortgage.
The people who can gift money for a mortgage down payment are those related to you by blood, marriage, legal guardianship or adoption. Nonrelatives who have familial relationships with you can also help you put money down with personal funds.
The list of acceptable donors varies by mortgage program. What is universal is that the parties who financially gain from your house purchase can’t contribute cash. Examples include real estate agents and homebuilders.
You can use equity as a down payment when given to you as a gift. This financial assistance comes in the form of a discount when the seller allows you to buy their house for less than its appraised value.
The giver must formally let the lender know in writing that the discount is a gift, not a loan you must pay back. The seller must meet the criteria for an eligible donor, which usually means someone related to you.
A gift of equity is taxable. The impact is immediate for the giver and deferred for the recipient.
The donor is liable for the gift tax when contributing more than the annual exclusion per donee set by the IRS. However, the federal government deducts the excess amount from the giver’s lifetime tax exception, so an equity gift rarely triggers an out-of-pocket payment.
The recipient is liable for capital gains tax due upon filing their income tax return in the year of the property’s resale. A gift donation increases tax liability because it reduces the cost basis, the baseline used for the capital gains calculation.
This gift proves that equity can increase your net worth from day one as a homeowner. While this donation has drawbacks that merit serious consideration, it boosts your ability to finance a house better than any financial assistance available to mortgage borrowers.
