A gift of equity turns part of a relative's home value into your down payment. Say your grandparents' home is worth $340,000. They sign a contract with you at $340,000 and give you $68,000 of their equity, and the lender treats that $68,000 the way it would treat cash for your down payment. Nothing changes hands at closing for that part. It shows as a credit to you on the settlement statement.
How FHA and Conventional handle it
FHA. HUD lets only family members give equity on a home they're selling to family. The gift can cover the 3.5% minimum required investment at a 580 score, or the 10% from 500 to 579. FHA normally holds sales between related parties to 85% loan-to-value, but when you're buying a family member's home to live in as your primary residence, the usual 96.5% maximum applies.
Conventional. Fannie Mae allows a gift of equity on a principal residence or a second home, from the same donors it accepts for cash gifts. It can pay all or part of the down payment and closing costs, including prepaids, though it can't count as reserves. On a single-family home you'll live in, there's no minimum from your own pocket. On 2 to 4 units with less than 20% down, Fannie Mae's 5% own-funds rule for gifts applies to equity too.
VA and USDA. Both finance 100% of the price, so there's no down payment for equity to cover. A relative selling below value still lowers the loan and the payment.
The paperwork on both FHA and Conventional is a signed gift letter stating the dollar amount of equity and that no repayment is expected, plus the settlement statement showing the credit. An appraisal confirms the value the gift is measured against.
A worked example on a $340,000 home
The home appraises at $340,000, and you'll live in it. Here are three ways the family can structure the sale, with principal and interest at a 5.75% rate.
| Conventional, 20% equity gift | FHA, 20% equity gift | FHA, 3.5% equity gift | |
|---|---|---|---|
| Gift of equity | $68,000 | $68,000 | $11,900 |
| Base loan | $272,000 | $272,000 | $328,100 |
| Upfront mortgage insurance | None | $4,760.00 | $5,741.75 |
| Total loan | $272,000.00 | $276,760.00 | $333,841.75 |
| Principal and interest | $1,587.32 | $1,615.10 | $1,948.21 |
| Monthly mortgage insurance | $0 | $113.33 | $150.38 |
| Principal, interest and mortgage insurance | $1,587.32 | $1,728.43 | $2,098.59 |
The Conventional loan at 80% of the value carries no private mortgage insurance at all, which makes it $511.27 a month cheaper than the smallest FHA gift. FHA with a 20% gift pays 0.50% a year in mortgage insurance, and because the loan-to-value is 90% or less, that premium stops after 11 years. The Conventional column needs a 620 score. Below 620, the FHA columns work from 580 with 3.5%, or from 500 with 10%.
Property tax and insurance are left out of the table because they're the same on all three. Once you live there as your primary residence, you can file for your county's homestead exemption.
When the gift isn't enough
- Size the gift to cover closing costs. On Conventional, Fannie Mae lets a gift of equity pay closing costs and prepaids as well as the down payment. On FHA, the family seller can also pay closing costs as a seller credit, up to 6% of the price.
- Combine it with a cash gift. Another relative can gift cash for closing costs with a separate gift letter.
- Add a co-borrower. If income is the issue, a parent or other relative can join the loan on FHA or Conventional and add their income.
- Close through a title company. A family sale still needs a title search, title insurance and a proper closing, and those costs belong in your cash to close.
The cash to close calculator shows what you'd bring with a gift and a seller credit at any price. Before the family signs a contract, call AAA Capital Funding at 888-601-8344 and we'll show you how much equity to gift for the lowest payment and the smallest check at closing.