Gift of Equity vs. Gift Funds in Family Home Purchases

Buying a home from a family member can be one of the smartest ways to get into homeownership — if it’s structured correctly. The biggest mistake buyers and agents make? Confusing gift equity with gift funds.

They sound similar. Underwriting treats them very differently.

Let’s clear it up.

What Is a Gift of Equity?

A gift of equity occurs when a seller — most commonly a family member — sells a home below its appraised market value, and the difference becomes equity credited to the buyer.

Gift equity characteristics:

• Comes from a reduced purchase price
• Must be supported by an appraisal at market value
• Documented in the purchase contract and closing disclosure
• No cash back to the buyer
• Common in parent-to-child or family-to-family transactions

Example:
Appraised value: $400,000
Family sales price: $360,000
Gift of equity: $40,000

That $40,000 may satisfy down payment or loan-to-value requirements depending on the loan program.

SEO takeaway: Gift equity = equity created by price reduction, not cash.

What Are Gift Funds?

Gift funds are actual cash used to help pay:

• Closing costs
• Prepaid items
• Reserves (if required)

Gift fund rules:

• Must be documented with a gift letter
• No repayment allowed
• Usually cannot come from an “interested party” (such as the seller)

This is where deals derail.

A seller may be allowed to give equity — but not cash.

Gift Equity & Seller Concessions by Loan Type

Conventional Loans (Fannie Mae / Freddie Mac)

• Gift of equity: Allowed
• Eligible donors: Parents, children, siblings, grandparents, aunts/uncles, nieces/nephews, cousins, legal guardians, domestic partners (relationship must be documented)
• Gift funds: Allowed from acceptable non-interested donors

Max seller concessions:

• 3% if down payment < 10%
• 6% if down payment ≥ 10%
• 9% in limited higher-down-payment scenarios

FHA Loans

• Gift of equity: Allowed
• Eligible relatives: Family members by blood, marriage, or legal guardianship
• Gift funds: Allowed from family, close friend with a clearly defined and documented interest in the borrower, charitable organization, borrower's employer or labor union, or governmental agency or public entity providing homeownership assistance or other approved assistance programs.

Max seller concessions:

• 6% of the purchase price

VA Loans (Important Reality Check)

VA loans do not automatically prohibit family purchases or non-arm’s-length transactions, but many lenders apply stricter investor overlays.

• Gift of equity: Potentially allowed if structured as a clean price reduction
• Gift funds: Allowed if documented and within inducement limits

Max seller concessions:

• 4% seller concession cap plus normal allowable closing costs

Key VA takeaway:
The VA may allow it — your lender may not. Always confirm upfront.

USDA Loans (Guaranteed)

• Gift of equity: Allowed
• Must be a true price reduction
• Appraiser must be informed of the family relationship
• No cash back to the buyer
• Gift funds:
• Seller cannot provide cash gifts (seller is an interested party)

Max seller concessions:

• Up to 6% of the purchase price toward closing costs

Questions to Ask Your Lender Before a Family Purchase

(This checklist alone can save weeks of stress)

1. Do you allow non-arm’s-length family purchases for this loan type?
2. Can the gift of equity be used toward down payment or LTV?
3. Are there investor overlays I should know about (especially for VA)?
4. Can the seller also pay closing costs, or is that restricted?
5. Does the appraiser need advance notice of the family relationship?
6. How should the purchase contract be worded to avoid underwriting issues?
7. Is there any scenario where this structure creates cash back risk?

If your lender can’t answer these clearly before the offer is written, pause... or partner with me as your lender. 

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Theresa Rolen, Loan Originator

NMLS# 2249004 | Brokerage NMLS #1850081

Cell 913-705-0049

Email Theresa@SummitLendingUSA.com