FHA Gift of Equity · Family Home Sales · NMLS #1630225
FHA Gift of Equity — When Family Sells You the Home
A relative sells you the house below its appraised value, and the difference becomes your down payment. Because the sale is between family it is an identity-of-interest purchase, which caps the loan at 85% of value — and the appraisal, not the agreed price, is what decides how big the gift really is.
Last updated August 2026 · reviewed by a licensed mortgage broker
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Understanding the Gift of Equity
An FHA gift of equity lets a family member sell you their home below market value and use the built-in equity as your down payment. Below is how it works, the rules, and who qualifies.
What Is an FHA Gift of Equity?
An FHA Gift of Equity happens when a family member sells you their home for a price below what it is actually worth, and the difference is treated as a gift toward your purchase rather than as cash changing hands. HUD’s own handbook describes a gift broadly enough to include equity, not just money in a bank account — so the value a parent gives up by selling below market price can do the same job that a cash down payment would. For a buyer who has the income to support a mortgage payment but has not saved a large down payment, this is often the difference between renting another year and owning a home today.
Here is what this looks like in practice. Say your parents’ home appraises for $350,000, but they agree to sell it to you for $320,000. That $30,000 difference is a gift of equity. On an FHA loan, that gift can be applied directly toward your 15% minimum down payment and toward your closing costs — in many cases covering both completely, so you walk into closing with little or no money out of pocket. The home does not change hands for free, and your parents do not hand you a check. The “gift” exists entirely on paper, in the difference between two numbers: what the home is worth and what you are paying for it.
Eligibility & Documentation
FHA Gift of Equity Requirements
FHA allows gifts of equity, but it does not allow them to be informal handshake arrangements. Below is a plain-language breakdown of the requirements your transaction needs to satisfy.
| Requirement | What FHA Expects |
|---|---|
| Credit Score Requirments | The minimum credit score FHA requires for a Gift of Equity is 500. Having a higher credit score will give you the lowest interest rate and the best available terms. |
| Eligible Relationship | The seller must be a family member of the buyer — a parent, grandparent, sibling, child, aunt or uncle, in-law, legal guardian, or domestic partner. Friends, business partners, and unrelated co-investors do not qualify under FHA’s gift of equity rules. |
| Independent Appraisal | An FHA-approved appraiser must inspect the home and determine its current market value. The gift of equity is calculated as the difference between this appraised value and the agreed sale price. |
| Signed Gift Letter | The donor signs a letter stating the dollar amount of the gift, confirming the family relationship, and certifying that no repayment is expected in any form. We provide the gift letter template and review it with both parties before signing. |
| Sales Contract | The purchase contract must show the actual agreed sale price, and the gift of equity amount must be clearly disclosed and match the gift letter and the closing disclosure exactly. Mismatched numbers are the most common reason these files get delayed. |
| Minimum Down Payment | Because a family sale is an identity-of-interest purchase, the loan is capped at 85% of the adjusted value, which means 15% down. A gift of equity can satisfy all of this, as well as closing costs and prepaid items, as long as the documentation is complete. |
| Occupancy | The home must be your primary residence. FHA financing — including gift of equity transactions — is not available for investment properties or second homes. |
| Credit & Income | A gift of equity covers the down payment, not your qualifications. You still need to meet FHA’s credit and income requirements on your own — see our full FHA loan requirements guide for details. |
| Gift Tax Disclosure | FHA itself does not tax the gift, but the seller may need to be aware of IRS gift tax reporting rules if the equity gift exceeds the annual exclusion amount. We always recommend the donor speak with a tax professional about their specific situation. |
How a Gift of Equity Affects Your FHA Loan
A gift of equity touches almost every part of your FHA file, from the appraisal to the closing disclosure. Here is what changes — and what does not — when family equity is part of the deal.
Our Process
How We Help You Structure an FHA Gift of Equity
Gift of equity transactions are not complicated, but they have more moving pieces than a standard purchase — an appraisal, a gift letter, a sales contract, and a closing disclosure that all have to agree with each other. Here is how we keep everything on track from start to finish.
Free Consultation About Your Family Sale
We start with a conversation about the property, the relationship between buyer and seller, the rough value of the home, and what the seller is comfortable selling for. This first call is free and helps us figure out, in general terms, how much of a gift of equity makes sense and whether it covers your full down payment.
We Confirm Eligibility and Draft the Gift Letter
We confirm that your family relationship qualifies under FHA guidelines, then provide a gift letter template that meets HUD’s exact wording requirements. We review it with both the buyer and the donor so there is no confusion about what it says or what it means before anyone signs anything.
We Order the Appraisal and Confirm the Numbers
Once a sales contract is in place, we order an FHA-approved appraisal. When the appraised value comes back, we recalculate the exact gift of equity amount, confirm it covers your 15% down payment and closing costs, and make sure the contract price is consistent with everything else in the file.
Full FHA Underwriting With the Gift Applied
Your file goes through the same FHA underwriting as any other purchase — income, employment, credit, and assets — with the gift of equity applied to satisfy your down payment requirement. Because we have done these before, we know exactly which documents underwriting will ask for and we gather them up front.
We Manage the File Through Closing
From clear-to-close through the day you sign at the title company, we make sure the gift letter, the sales contract, and the closing disclosure all match exactly. Family sales carry an extra layer of paperwork, and we treat that paperwork as our job — not yours.
What Creates the Gift
The Appraisal Decides How Big the Gift Actually Is
Families usually settle on the price first and work out the gift afterwards. It runs the other way. The appraisal sets the value, and the gift is whatever sits between that value and the price. Until the appraisal is back, the number everyone has been discussing is an estimate.
The gift is the gap, not the discount you agreed
If the family agrees on a price of $320,000 and the home appraises at $350,000, the gift is $30,000. If the same home appraises at $335,000, the gift is $15,000 — the agreed price has not changed, but the gift has halved.
That matters because the gift is what covers your down payment. A lower appraisal than expected does not just reduce a number on paper; it can leave you needing to find real money you had not planned on.
Which is why the price is best set after the value
Where families run into trouble is agreeing on a round number early, telling everyone that is the deal, and then discovering the appraisal does not support the gift they were counting on. Renegotiating with a relative is harder than renegotiating with a stranger.
The straightforward version is to agree on the shape of the deal, get the appraisal, then set the price so the gift lands where it needs to. Nothing is lost by doing it in that order and a good deal can be lost by not.
What the seller is actually giving up
It is worth saying plainly, because it often goes unsaid in family conversations: the gift is real value the seller is choosing not to receive. They walk away from closing with less than the house was worth, by exactly the amount of the gift.
Most families are entirely comfortable with that once it is stated out loud. The ones who are not are better off finding out at the start. There can also be tax reporting on the seller’s side depending on the size of the gift. That is a question for their accountant rather than for a lender, and it is worth asking before the sale rather than after.
Before You Start
What Happens After You Apply
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Someone on our team covering your state.
- We ask for documents and pull credit
Only once you have decided to move forward.
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FAQ
FHA Gift of Equity — Frequently Asked Questions
Related FHA pages: FHA loans overview · FHA down payment · FHA loan requirements.
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Find out what the gift will actually be
A licensed loan officer will work back from what the home is likely to appraise for, show you the gift that price produces, and confirm what the 85% cap leaves you to bring — before the family agrees a number they cannot easily change.
Written and reviewed by Chris Luis, Broker/Owner of Mortgage-World.com, NMLS #1630225. About the author