When a friend or family member sells you a home (or real estate) for a price below the fair market value, it is called a gift of equity. Since the equity is the difference between the sales price and the home’s market value, this “gift” does not include money. If the buyer supplements the transaction with a conventional mortgage, sometimes a gift of equity can help the buyer avoid paying private mortgage insurance if the equity surpasses 20%.
Some lenders allow a gift of equity to be used as a down payment on the home. Home sales involving a gift of equity typically require an appraisal and a letter or documentation that outlines the appraisal price, the home’s sale price, a statement from the buyer and seller that clearly states their relationship and nature of the gift, and signatures from all parties.