By Frederick Blum, Broker/Owner of Blum Realty Group
Buying a home from a parent or another family member can give you a path into a property you already know. If the seller wants to help financially, a gift of equity may become part of the purchase. That help needs to fit the loan, the seller’s actual proceeds and the written agreement—not just the family’s understanding of what the house is worth.
The practical question is how to turn “we want to keep the home in the family” into a transaction that works for both households. I would begin with four numbers: a supportable property value, the agreed purchase price, the proposed equity gift and the seller’s remaining loan balance. Then we can examine the buyer’s financing, cash needs and condition of the home.
This guide concerns buying the relative’s property. If a family member is sending money to help you buy from someone else, start with our guide to buying with family gift funds.
A gift of equity is a seller contribution of ownership value
With a cash gift, money moves from a donor into the purchase. With a gift of equity, the seller gives the buyer a portion of the seller’s equity as a transaction credit. The family is using value already held in the property to help structure the purchase.
Fannie Mae’s gift-of-equity guidance permits an eligible gift for a principal-residence or second-home purchase. It can fund eligible down-payment and closing expenses, including prepaid items, but cannot satisfy financial reserves. Acceptable-donor and minimum-borrower-contribution rules also apply.
Those are Fannie Mae rules, not a promise that every lender or loan program will approve the family’s proposed arrangement. Ask the lender to identify the applicable program and review the relationship, intended occupancy, amount and transaction documents before the family settles on a structure.
A lower purchase price and a separately documented gift of equity are not interchangeable instructions to escrow. Let the lender and escrow team explain how the intended transaction needs to appear in the contract and closing figures. Do not inflate the price to create a paper gift.
Calculate the buyer’s financing and the seller’s proceeds separately
Consider a simplified example: the family proposes an $800,000 purchase, a $160,000 equity gift and a $640,000 new mortgage. Assume the lender accepts the structure and the required valuation supports it. The gift supplies 20% of the price in this illustration; actual eligibility, loan-to-value calculations and mortgage pricing still need lender review.
Now look at the seller’s side. If the existing mortgage payoff is $300,000, the $640,000 coming from the buyer’s new loan leaves approximately $340,000 before seller closing expenses and other adjustments. The seller does not receive $800,000 in cash and then keep the entire $160,000 being gifted.
- Buyer question: What cash is still needed for closing expenses, inspections, moving and reserves?
- Seller question: Will the remaining proceeds cover the seller’s next home and other obligations?
- Family question: Is the intended gift affordable for the donor without a private repayment arrangement?
If buyer closing expenses were $18,000 and the entire gift were allocated to the down payment in this example, those expenses would still need an approved funding source. A large equity gift does not automatically leave the buyer with spendable cash after closing.
A shortfall in the appraised value could also change the proposed financing. Decide in advance whether the family could adjust the price, gift, loan amount or buyer contribution if the lender’s valuation does not support the original plan. Our low-appraisal guide explains how financing math can change when value and contract price differ.
Have the lender review the family relationship and paperwork early
Tell the loan officer from the beginning that the seller is a relative and intends to give equity. Supply the proposed terms, not just a purchase price that makes the loan payment attractive. The lender needs to evaluate the real transaction.
For a Fannie Mae loan using this arrangement, the cited guidance requires a signed gift letter and a settlement statement showing the equity gift. The lender should specify the wording and supporting records for the file. Do not rely on a family text exchange as the complete loan documentation.
Ask the loan officer to resolve these questions before the purchase agreement is finalized:
- Does this donor relationship and intended use qualify under the selected program?
- How will the purchase price, appraised value and gift be used in calculating the loan?
- Which expenses can the gift cover, and what cash or reserves must the buyer provide?
- Will any seller credit or other financing change the approved structure?
- What appraisal, title and property-condition requirements remain?
The buyer still needs a sustainable monthly payment. Compare principal and interest with the property’s anticipated taxes, insurance, HOA dues and maintenance rather than measuring affordability only by the down payment avoided. Our homeownership-cost guide provides a broader budgeting framework.
Write down the terms that familiarity can otherwise hide
Families often agree on a headline price while leaving the details for later. Those details matter when one household is selling its largest asset and another is taking on a mortgage.
Discuss possession, included appliances, personal belongings, repair responsibility and the date the seller will move. If the seller wants to remain after closing, that arrangement needs lender review and appropriate written terms. An informal promise that a relative can stay “as long as needed” can collide with the buyer’s occupancy requirements and moving plans.
Also be direct about any expectation of repayment, future appreciation or ownership. If the seller expects money back later, tell the lender and obtain advice on the actual financing arrangement. It should not be documented as a no-repayment gift while a separate family understanding says otherwise.
Representation should be clear too. Identify whom the agent represents, how information will be shared and which legal or tax questions need independent advice. The goal is a workable purchase with informed decisions on both sides, rather than asking family trust to substitute for the transaction documents.
Inspect the home even if you grew up there
Knowing where the plumbing shutoff is does not tell you the current condition of the sewer line, roof or electrical system. A familiar home still deserves inspections appropriate to its age, features and condition.
Gather available repair records, permits, warranties and information about additions or converted rooms. Review the preliminary title report, existing liens, HOA documents where applicable and the disclosures required for the actual transaction. Any claimed disclosure exemption should be checked rather than assumed from the family relationship.
If inspection identifies a significant issue, separate the cost of the work from the amount of help already being given. For example, a buyer receiving substantial equity may still lack cash for a roof replacement immediately after closing. Obtain actual estimates and revisit the plan before removing relevant contractual protections.
This is also the point to compare the home with the buyer’s longer-term needs. A favorable family arrangement can be valuable, but the floor plan, location, upkeep and total monthly expense still need to fit the buyer’s life.
Review property taxes and federal tax treatment before signing
Do not budget on the assumption that the seller’s existing California property-tax bill will simply continue. The Board of Equalization’s Proposition 19 guidance describes specific conditions for parent-child and qualifying grandparent-grandchild transfers, including principal-residence and filing requirements. A family connection alone does not settle eligibility. Confirm the property’s treatment with the assessor and your tax adviser.
The seller should also obtain advice about the tax consequences of a partly gifted transaction. The IRS’s gift-tax guidance covers transfers for less than full value. The buyer should retain records needed to establish tax basis; the IRS’s home-sale publication treats acquisition by gift or bargain sale separately from an ordinary fair-market purchase.
Ask the advisers for answers using the proposed numbers and family circumstances. Loan approval, property-tax treatment and federal tax reporting each address a different part of the purchase.
Bring the contract, loan and escrow figures back together
Before closing, compare the approved gift amount with the lender’s documents and escrow’s settlement figures. Confirm the seller payoff, buyer funds required, possession arrangements and any agreed credits. Resolve discrepancies while there is time to correct the documents.
If the plan changes—from a larger equity gift to a cash contribution, for example—tell the lender, agent and escrow team. Each needs the same instructions. Keep the transfer through the approved closing process instead of settling an unreported difference privately after recording.
At Blum Realty Group, I can help a family buyer evaluate the property, organize the transaction and coordinate the purchase details with the lender and escrow team. A clear agreement protects the practical purpose of the gift: helping the buyer move forward while allowing the seller to make an informed decision about the value being given.
Questions about buying from family with an equity gift
Does a gift of equity mean I need no cash at closing?
It depends on the approved loan structure and which expenses the gift covers. Closing costs, any required borrower contribution and reserves need separate review; Fannie Mae does not allow the equity gift itself to satisfy reserves.
Can we skip an appraisal because we agree on the value?
The lender determines its valuation requirements. A family agreement does not override them. Establish how the financing would change if the lender’s accepted value differs from the family’s proposed price.
Can the seller keep living in the property after the purchase?
Raise that plan before committing. The lender must review the intended occupancy, and the possession arrangement needs appropriate written terms addressing timing, expenses and responsibilities.