What Is a Gift of Equity Letter?

When a homeowner is hoping to sell their home to a loved one, a gift of equity can help make the purchase more affordable by reducing the home’s purchase price. Learn more here.
Written by Melanie Krieps Mergen
Reviewed by Melanie Reiff
Updated on Apr 01, 2022
When a homeowner is hoping to sell their home to a loved one, a gift of equity can help make the purchase more affordable by reducing the home’s purchase price. A gift of equity letter is a document that’s used to solidify the agreement between a buyer and seller about the gift of equity.
In some cases, a gift of equity can even eliminate the need for a buyer to have a down payment, but a seller should consider costs like tax implications on their end before they determine a gift of equity amount.
If you’re wondering about gifts of equity, home and
car insurance
comparison app
is here to give you the rundown. Read on to learn more about gifts of equity, including what they are, how they work, and some of their pros and cons.

What is a gift of equity?

A gift of equity is given when someone sells their home to another person at a price that’s less than the current market value. The gift of equity is the difference between that lower sales price and the current market value.
A gift of
is commonly used in home sales between family members and can make it easier for the buyer to qualify for a mortgage.

How a gift of equity works

A gift of equity sounds great in theory, but how exactly does it work?
Here’s how. Let’s say Rebecca’s parents are retiring, and they’ve decided they’re going to sell their family home and move into their smaller vacation condo full-time. 
Meanwhile, Rebecca is looking for a home to buy, and she’s preparing to qualify for a
. They’d like to keep the house in the family, so they’re planning to use a gift of equity to help make it easier for Rebecca to qualify for a mortgage.
A gift of equity amount could be whatever amount a home’s seller decides—even the entire purchase price of the home, if they wanted to. In this case, Rebecca’s parents have decided they want to provide a gift of equity large enough to cover the down payment on their home.
Rebecca’s parents’ house is valued at $250,000, meaning a 20% down payment would require $50,000. Instead of giving Rebecca a check for $50,000, her parents are just going to sell it to her for $50,000 less at $200,000.
The gift of equity is $50,000, and that discount will count as her 20% down payment, making it easier for Rebecca to qualify for her mortgage. Plus, because the down payment was 20%, she won’t have to worry about needing to pay private mortgage insurance (PMI), either.
Pro Tip Even with a gift of equity, the buyer will still be responsible for closing costs, so it’s important to make sure they’re prepared to pay them before determining a sales price and gift of equity amount.

What are the requirements for a gift of equity?

A gift of equity mainly requires two things: an equity gift letter and an appraisal to determine the home’s value.
A professional
will be required so the sellers can determine how much of a gift they’re giving in comparison to their home’s value. 
Then, the buyer and seller will be required to sign a gift of equity letter detailing information about the gift, which should include:
  • Gift of equity amount
  • Appraisal and the sale price of the home
  • Relationship between seller(s) and buyer(s)
  • Statement that the gift of equity isn’t a loan and doesn’t need to be repaid 
  • Address of the property for sale
Your lender might have a gift letter template you can use for your equity gift letter, so it’s a good idea to check with them on how they’d like to proceed with it.
Who can give a gift of equity can vary a bit depending on the buyer’s mortgage lender. Federally-backed loan guidelines only allow gifts of equity to be given to family members, for example.
Other lenders can be more lenient and allow gifts of equity for fiances or domestic partners, or in some cases, someone you’re not that closely associated with. However, using a gift of equity when there is a more distant relationship between the buyer and seller can potentially open up a mortgage application to closer scrutiny.  

Gift of equity: the pros and cons

While there are plenty of benefits to buying a home with a gift of equity, there are also some cons to consider. Here’s a brief rundown on some of each.

Gift of equity pros

  • Recipient will have low or no down payment: Depending on the amount, a gift of equity could cover some or all of a buyer’s down payment, meaning they’ll be covering fewer costs out of pocket.
  • Buyer could more easily qualify for a mortgage: A gift of equity that helps the buyer cover some of the costs of buying their home can put them in better financial standing to qualify for a mortgage.
  • Buyer could avoid PMI requirement: When a gift of equity covers some or all of a buyer’s down payment, it could help them avoid paying PMI as they make monthly mortgage payments.
  • Saves time when selling a home: If a seller is looking to speed up the process of selling a home, a gift of equity could help the buyer make the purchase sooner.

Gift of equity cons

  • Gift tax
    implications: Before a seller gives a gift of equity, it’s important to note that the gift could have tax implications, depending on the amount given. Generally speaking, gifts from individuals less than $15,000 and gifts from spouses less than $30,000 won’t be subject to a gift tax, while amounts higher than that will. Buyers should consult a tax professional before determining a gift of equity amount.
  • Legal fees: If you’re making use of an attorney to properly draft a gift of equity letter, or to review implications of any other parts of the process, you’ll also have to account for the cost of legal fees.
  • Closing costs: While a gift of equity can greatly reduce the cost of buying a home, and in some cases, eliminate the need for the buyer to provide a down payment, the buyer will still be responsible for closing costs.
  • Potential impact on local real estate market: Depending on the determined gift of equity amount, the final sales price of a home, if it’s well below the appraised value, could have an effect on the values of other homes in the neighborhood.

How to find a great deal on home insurance

Making sure a gift of equity is carried out properly and qualifying for a mortgage are both complicated processes. Finding a great deal on home insurance?
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