Market value determination forms the foundation of any gift of equity transaction. Professional appraisals establish fair market value, creating the baseline from which the gift amount gets calculated. The Federal Housing Administration requires arms-length appraisals even for family transactions, ensuring legitimate valuations.

Purchase price agreement reflects the actual amount the buyer pays, which must be below appraised value to create the equity gift. The difference between appraised value and purchase price constitutes the gift amount, directly reducing or eliminating the buyer’s down payment requirement.

Down payment credit applies the gift amount toward the buyer’s required down payment and potentially closing costs. Most conventional loans require 20% down to avoid private mortgage insurance, making gift of equity particularly valuable for buyers lacking substantial savings.

[Image: Comparison chart showing traditional purchase with cash down payment versus gift of equity structure]

Transaction Component	Amount	Percentage
Appraised Market Value	$400,000	100%
Agreed Purchase Price	$320,000	80%
Gift of Equity Amount	$80,000	20%
Buyer’s Cash Needed at Closing	$0	0%
Loan Amount (if no additional down payment)	$320,000	80% LTV

Immediate Family Members

Immediate family members represent the most common and straightforward gift of equity providers:

• Parents to children (including stepparents and adoptive parents)
• Grandparents to grandchildren
• Siblings to siblings (including half-siblings)
• Children to parents (less common but allowable)
• Spouses to each other (in specific circumstances)

Extended Family Considerations

Extended family considerations vary by loan program:

• Aunts and uncles (accepted by FHA, varies for conventional)
• Cousins (generally only with FHA loans)
• Legal guardians (with proper documentation)
• Domestic partners (depending on state laws and lender policies)

[Image: Family tree diagram showing eligible gift of equity relationships with color coding for different loan programs]

Purchase Agreement Specifications

Must clearly state:

• Relationship between buyer and seller
• Agreed purchase price below market value
• Explicit mention of gift of equity amount
• Statement that gift requires no repayment
• Signatures from all parties involved

Gift Letter Requirements

Include specific mandatory elements:

• Donor’s name, address, and relationship to recipient
• Property address and purchase price
• Explicit gift amount and statement of no repayment
• Donor’s affirmation of financial ability to provide gift
• Statement that funds aren’t borrowed
• Dated signatures from all donors

Step 1: Establish Property Value

Order a professional appraisal from a licensed appraiser to establish current market value. This appraisal must be ordered through the lender to meet underwriting requirements. The appraiser should be informed this is a family transaction but must still provide an unbiased market valuation.

Step 2: Determine Gift Amount

Calculate the gift of equity by subtracting the agreed purchase price from the appraised value. Consider the buyer’s loan program requirements and whether additional cash will be needed for closing costs. Most conventional loans allow gift of equity to cover the entire down payment.

Step 3: Select Appropriate Financing

Work with a mortgage professional experienced in gift of equity transactions. Different loan programs have varying requirements for gift amounts and documentation. FHA loans are often more flexible with gift sources, while conventional loans may offer better rates with sufficient equity.

Step 4: Prepare Documentation

Compile all required documentation including the gift letter, purchase agreement with gift of equity addendum, and any additional lender-required forms. Ensure all parties understand the transaction structure and have reviewed documents with appropriate advisors.

Step 5: Close the Transaction

Proceed through standard closing procedures with special attention to gift documentation. The settlement statement will reflect the gift of equity as a credit to the buyer. Sellers receive their net proceeds based on the agreed purchase price, while buyers gain immediate equity.

Tax Consideration	2024 Limits	Impact
Annual Gift Tax Exclusion	$18,000 per person	Gifts below this amount require no tax filing
Lifetime Gift Tax Exemption	$13.61 million	Larger gifts reduce lifetime exemption
Married Couple Combined Annual Exclusion	$36,000 per recipient	Doubles exclusion for joint gifts
Capital Gains Basis	Transferred to buyer	Buyer inherits seller’s tax basis

⚠️ Important Tax Consideration

Consult with a qualified tax professional before proceeding with any gift of equity transaction. Tax implications vary based on individual circumstances, gift amounts, and state regulations. Proper planning can minimize tax obligations while maximizing transaction benefits.

State/Region	Special Considerations	Documentation Requirements
California	Transfer tax calculations based on full value	Preliminary Change of Ownership Report required
Texas	No state income tax benefits	Gift affidavit may be required by county
New York	Mansion tax may apply on high-value properties	TP-584 transfer tax form required
Florida	Documentary stamp tax on full value	Specific gift disclosure requirements
Illinois	Real estate transfer tax considerations	PTAX-203 Illinois Real Estate Transfer Declaration

Mistake #1: Incorrect Documentation

Problem: Generic gift letters or missing required elements cause underwriting delays and potential loan denial.

Solution: Use lender-provided templates and include all required elements. Have documents reviewed before submission.

Mistake #2: Improper Valuation

Problem: Using outdated appraisals or informal valuations creates compliance issues and loan problems.

Solution: Order fresh appraisal through the lender following standard procedures. Never rely on tax assessments or online estimates.

Mistake #3: Tax Planning Oversights

Problem: Failing to consider gift tax implications or capital gains basis transfer creates unexpected tax liabilities.

Solution: Consult tax professionals before finalizing transaction structure. Consider spreading gifts across tax years if needed.

Mistake #4: Inadequate Buyer Qualification

Problem: Assuming gift of equity guarantees loan approval leads to failed transactions when buyers don’t qualify.

Solution: Complete full loan pre-approval before proceeding. Gift of equity helps with down payment but doesn’t improve credit or income qualification.

Strategic Implementation Guidelines

Ready to explore your options?

Connect with mortgage professionals experienced in gift of equity transactions to begin your journey.

[Date]

[Lender Name and Address]

RE: Gift of Equity for [Buyer’s Full Name]

Property Address: [Full Property Address]

To Whom It May Concern:

I/We, [Donor’s Full Name(s)], am/are providing a gift of equity to [Recipient’s Full Name], my/our [Relationship], in the amount of $[Gift Amount] for the purchase of the above-referenced property.

This gift represents the difference between the appraised value of $[Appraised Value] and the purchase price of $[Purchase Price].

I/We certify that:

• This is a bona fide gift with no repayment expected or implied

• The funds for this gift are my/our own and not borrowed

• I/We have no financial interest in the transaction beyond the sale

• This gift is being made solely to assist the buyer with the purchase

Sincerely,

_________________________ Date: _______

[Donor’s Signature]

[Donor’s Printed Name]