Buying a home with a “Gift of Equity” typically occurs between family members. It is when one person buys another person’s home and part of the down payment is a gift rather than cash. As an example I can sell my 200,000 house to my niece for 200,000 and give her a 50,000 gift of equity. Here, she will be actually paying me 150,000 for the house, because the down payment is the gift.

In the contract it will need to state that the purchase prices is 200,000, the 50,000 down payment was already received and the balance due is 150,000. She may then take the contracts to the bank and get a loan based on the purchase price of

200,000. If the house is valued at least 200,000, she will be able to get a mortgage for the entire 150,000 or 75% loan to value. Nice, right?

The gift of equity normally only applies when purchasing a primary residence. Most lenders will not allow second homes or investment properties to be purchase from family members using gifts of equity. Often if the gift is for more than 20% of the purchase price, the buyer will not have to come up with any money on their own. In normal FNMA mortgages, 5% of the borrowers’ own funds are required, however if greater than 20% is a gift, nada! The money for the closing costs can also be a gift!  This is great, but words of advice, document this and explain it to lender before you apply for the mortgage. Not all lenders will play by these rules and might have stricter guidelines.