The short answer
When a family member sells you a home for less than it is worth, the difference can count as your down payment. FHA allows this only between family members, and it needs a signed gift letter. The loan is based on the lower of the price and the appraised value.
How the numbers work
FHA bases the loan on what it calls the adjusted value: the lower of the purchase price and the appraised value.
Say your parents' home appraises at $500,000 and they agree to sell it to you for $500,000 with a $50,000 gift of equity.
- Price and value: $500,000.
- Gift of equity: $50,000, which is 10% of the price.
- Loan needed: $450,000 before mortgage insurance.
No cash changes hands for the gift. It is equity your parents are giving up. An illustration of the rule, not a quote or an offer.
Who can give it
Only family members may give equity as a gift on a home being sold to other family members. FHA's definition of family includes parents, grandparents, children, spouses and domestic partners, siblings, uncles, aunts and in-laws.
The paperwork
The lender needs a gift letter, signed and dated by the giver and by you, showing:
- the giver's name, address and phone number;
- the giver's relationship to you;
- the dollar amount of the gift;
- a statement that no repayment is required.
The 85% rule for family sales
FHA normally limits a sale between family members to a loan of 85% of the value. That limit is lifted when you are buying a family member's main residence to live in, or a home they own that you have rented for at least six months. Buying the home you rent, or buying from family
Questions still to confirm
Whether a gift of equity can cover closing costs, whether any cash back for repairs is allowed, and what happens if the sellers are behind on their own mortgage: confirm in the handbook before publishing.
What I see in real files
Jamal's own words go here: two to four sentences on what he sees in real files like this. Claude does not write this part.
Questions people ask next
Is a gift of equity taxable?
That is a tax question. Ask a CPA or tax preparer.
Do we still need an appraisal?
Yes. The loan is based on the lower of the price and the appraised value.
Can the seller be an estate?
To confirm before publishing.