Gift of Equity Calculator
A gift of equity lets a family member sell you their home below its appraised value - the difference between the appraised price and the sale price counts toward your down payment. Enter the home's appraised value, the agreed sale price, any extra cash you are contributing, your mortgage rate, and your loan term. The calculator shows the gift amount, your combined down payment percentage, the loan-to-value ratio, whether you clear the 20% PMI threshold, your gift tax exposure, and an estimated monthly payment.
What is a gift of equity?
A gift of equity occurs when a home seller - usually a family member - sells a property to a buyer at a price below its appraised market value. The difference between the appraised value and the sale price is the "gift," and most mortgage lenders treat it as if the buyer had paid that amount in cash as a down payment. For example, if a parent's home appraises at $400,000 and they sell it to their child for $320,000, the $80,000 difference is the gift of equity, which represents a 20% down payment. The buyer then needs a mortgage only for the $320,000 sale price minus any additional cash they contribute. Gifts of equity are most common in transactions between parents and children, siblings, grandparents and grandchildren, or domestic partners - lenders typically require a close family relationship and will not allow arm's-length sellers to use this structure.
How the loan-to-value ratio and PMI work
The loan-to-value (LTV) ratio compares the mortgage amount to the appraised value of the property. In a gift-of-equity transaction, the LTV is the loan amount (sale price minus any cash down payment) divided by the appraised value - not the sale price. When the LTV is 80% or below, most lenders waive private mortgage insurance (PMI), which is a policy that protects the lender if you default and typically costs $50-$200 per month. A gift of equity that pushes your effective down payment to 20% or more of the appraised value eliminates PMI and can significantly reduce your monthly costs. If the LTV remains above 80%, you will pay PMI until your regular payments bring the balance down to 80% of the appraised value, at which point you can request cancellation under the Homeowners Protection Act.
Gift tax rules and IRS Form 709
The IRS treats a gift of equity as a taxable gift from the seller to the buyer. Each donor can give up to $18,000 per recipient per year in 2024 without any reporting requirement - this is called the annual gift tax exclusion. A married couple together can give $36,000 to one recipient without filing. Any gift above the annual exclusion requires the donor(s) to file IRS Form 709, but filing does not mean paying tax: the excess simply reduces the donor's lifetime exemption, which is over $13.6 million in 2024. Most families never reach that threshold, so actual gift tax is rarely owed even on large equity gifts. The gift letter the lender requires (described below) also serves as documentation for the IRS if a return is ever needed.
Requirements: appraisal, gift letter, and lender documentation
To use a gift of equity as a down payment you need four things. First, a professional appraisal from a licensed appraiser establishes the fair market value - without it, neither the lender nor the IRS has a reference point. Second, a signed gift letter from the seller stating the amount of the gift, that no repayment is expected or required, and the relationship between the parties - lenders will not accept the equity as a down payment without this letter. Third, the purchase contract must clearly state both the appraised value and the agreed sale price so the gift amount is documented. Fourth, the buyer must qualify for the mortgage on their own creditworthiness: the gift covers the down payment but the buyer must still meet debt-to-income and credit score requirements. Conventional loans typically require that both parties are related; FHA loans are slightly more flexible but also require a gift letter and a family relationship.
LTV, Down Payment, and PMI Quick Reference
| Down Payment | LTV | PMI Required? | Typical Notes |
|---|---|---|---|
| Less than 5% | Above 95% | Yes | Very limited loan programs; FHA common choice |
| 5% | 95% | Yes | Conventional with PMI; FHA option |
| 10% | 90% | Yes | PMI until LTV drops to 80% |
| 15% | 85% | Yes | PMI until LTV drops to 80% |
| 20%+ | 80% or below | No | No PMI; best conventional rates |
| 25%+ | 75% or below | No | Strong position; may qualify for lower rates |
Typical lender treatment based on loan-to-value ratio. Exact terms vary by lender and loan type.
Frequently asked questions
Who can give a gift of equity?
Most lenders require the seller to be a family member - commonly a parent, grandparent, sibling, aunt or uncle, or domestic partner. Conventional loans backed by Fannie Mae and Freddie Mac explicitly require a familial or domestic relationship. FHA loans follow similar rules. Sellers who are unrelated to the buyer (arm's-length transactions) cannot use this structure, because the below-market price would simply look like a distressed sale rather than a gift.
Does a gift of equity count as a down payment?
Yes. Lenders treat the equity gift as a cash-equivalent down payment. The appraised value sets the baseline, and the difference between that value and the sale price counts toward the required down payment percentage. If the gift is large enough, the buyer may need little or no additional cash to close. However, the buyer still needs to cover closing costs (typically 2%-5% of the loan amount) unless those are separately gifted or rolled into the loan.
Does the seller owe gift tax on a gift of equity?
Rarely. The gift counts against the annual exclusion ($18,000 per person per recipient in 2024; $36,000 for a married couple). Any amount above the exclusion requires IRS Form 709, but does not trigger actual tax for most people: excess gifts simply reduce the donor's lifetime exemption, which exceeds $13.6 million in 2024. Only estates that may approach that threshold need to worry about actual gift tax. The buyer does not pay any tax on a received gift.
What is a gift letter and what must it include?
A gift letter is a signed document from the seller (the giftor) that confirms the nature of the transaction. Lenders require it before they will count the equity toward the down payment. It must include: the seller's name, address, and relationship to the buyer; the buyer's name; the property address; the gift amount in dollars; a clear statement that no repayment is required or expected; and the seller's signature and date. Some lenders have their own form; others accept a signed letter on plain paper.
Can a gift of equity help me avoid PMI?
Yes, if the gift is large enough to bring your effective down payment to 20% or more of the appraised value. At that point, your loan-to-value ratio is 80% or below, and most conventional lenders waive PMI entirely. If the gift gets you close but not quite to 20%, consider contributing a small amount of cash to close the gap - even eliminating PMI saves tens of thousands of dollars over the life of a 30-year loan.
What happens if the seller still has a mortgage?
The sale price must be high enough to pay off the seller's existing mortgage at closing. If the agreed sale price is below the outstanding mortgage balance, the seller has a shortfall and the deal cannot proceed without outside funds or a short sale approved by the seller's lender. This calculator shows the seller's net proceeds (sale price minus existing mortgage) so you can check this before finalizing the purchase price.
Is there a limit on how large the gift of equity can be?
No strict dollar limit exists on how much equity can be gifted - the seller can theoretically give the entire value of the home. However, lenders impose loan minimums, and very large gifts relative to the appraised value can attract extra scrutiny. For FHA loans, the gift can cover the entire required down payment and even closing costs. For conventional loans, if the down payment is 20% or more, the entire amount can be a gift; if it is less than 20%, some lenders require the buyer to contribute at least 5% from their own funds - check with your lender.