how a gift of equity works
home equity is the value of a property minus any outstanding debts secured by that home giving a gift of equity means giving someone value in a home a homeowner typically sells it to someone else for less than its true market price the transfer counts as a gift because of the difference in value even if there are no payments from one party to the other for example if you own a home worth 300 000 and sell it to a family member for 200 000 they ve received a gift of equity of 100 000 a gift of equity can occur if a home is given away for no compensation or if a discount is offered on its value common gifts of equity are between parents selling their home and a child however these gifts can involve other family members such as grandparents aunts and uncles cousins siblings or a child gifting to a parent most lenders allow the gift to count toward a down payment on the home the residence that s changing hands can be a primary residence or a second home gifts of equity help the buyer reduce or eliminate down payment requirements making it easier to secure a mortgage buyers must still qualify for a mortgage even with a gift of equity this means that they ll need to meet the lender s requirements regarding credit scores and income they ll also need to have the necessary documentation to get approved for a mortgage sellers also need to consider what they re walking away from with a gift of equity they may be helping a relative to purchase a home who might be unable to otherwise however the seller could lose an opportunity to reap a sizable profit from the home s sale you can use a gift of equity or gift funds for different types of mortgages including conventional home loans or adjustable rate mortgages as well as federal housing administration fha and u s department of veterans affairs loans 12advantages and disadvantages of a gift of equitythe most obvious benefit of using a gift of equity is that the buyer doesn t have to secure a down payment that s because the gift of equity can be used as a down payment this saves the recipient time and money especially considering the minimum down payment for an fha mortgage is 3 5 3 here s a further list of the benefits of a gift of equity there are disadvantages to gifts of equity lower or no down payment for the buyerno need for cash to exchange hands between the giver and recipientno real estate agent commissions