A gift of equity is a home-sale price reduction from the seller to the buyer that functions as a gifted equity contribution instead of cash.
A gift of equity is a home-sale price reduction from the seller to the buyer that functions as a gifted equity contribution instead of a separate cash gift.
Gift of equity matters because it can help a buyer satisfy part of the equity or down-payment requirement without bringing all of that value in cash. That can make a family transaction or other eligible transfer much more workable.
It also matters because borrowers often confuse a gift of equity with Gift Funds. Gift funds are cash provided to the borrower. Gift of equity is value created through the sale structure itself.
Borrowers encounter gift-of-equity issues when buying from an eligible seller who is willing and able to transfer value through the contract price rather than only through a separate cash contribution.
The term becomes practical during qualification, contract structuring, and underwriting review because the lender needs to understand how the equity contribution is being created and documented.
A parent sells a home to a child for less than market value. The difference between the market value and the agreed sale price may function as a gift of equity if the loan program and documentation allow it.
Gift of equity differs from Gift Funds because gift funds are actual cash, while gift of equity is value embedded in the transaction price.
It also differs from Down Payment. A down payment is the buyer’s contribution requirement. A gift of equity can be one way to help satisfy that requirement.