Buying a home from a family member can be a smart way to get into homeownership, and it comes with some unique financial advantages that you wouldn’t get in a traditional sale.

One of the biggest benefits?

You can use a Gift of Equity to cover not only your down payment but also your closing costs.

What is a Gift of Equity?

A Gift of Equity is when the seller (in this case, your family member) gives you a portion of the home’s value as a gift, usually by selling it to you below market value. The difference between the market value and the sale price is considered "equity" and can be counted toward your down payment and closing costs.

Example:

• The home's market value: $400,000
• Your family member sells it to you for: $350,000
• The $50,000 difference is a Gift of Equity

That $50K gift can be applied toward:

• Your down payment (for an FHA loan, you only need 3.5% down. $14,000 in this case)
• Closing costs

How do you structure it to end up with $0 out of pocket?

Let's use the above example again:

• Family member wants to net $350,000.00
• The appraised value is $400,000.00
• The closing costs are $10,000.00

This is how I'd structure it:

• Purchase price: $400,000.00
• Gift of equity: $50,000.00
• Loan amount: $360,000.00

When you structure it this way, you'll end up with $0 out of pocket, and your family will net the $350,000.00

You'll allocate $10,000.00 of the gift of equity toward the closing costs, and the rest will go toward the down payment. That's how we ended up with the $360,000.00 Loan amount

$10,000.00 closing costs + $40,000.00 down payment = $50,000.00 Gift of Equity

Can you get a temporary buydown with a gift of equity?

Short answer, yes, but not as a gift.

Here's what a temporary buydown is. It basically lowers your payment for the first few years.

Temporary buydowns must be paid for by the seller. The underwriter will likely want it labeled as a "seller credit" rather than a "gift of equity." So if the Gift of Equity is $50,000.00 and the temporary buydown costs $5,000.00, then you'll adjust it so the gift of equity is $45,000.00 and the seller credit is $5,000.00. This is just an underwriting quirk to get past.

Important Requirements

• The gift must be documented with a Gift Letter stating that the money isn’t a loan and doesn’t need to be repaid.
• An appraisal is required to confirm the market value of the home.
• The relationship between the buyer and seller must be disclosed to the lender.

Why This Strategy Works:

Since you're buying from family, you’re essentially leveraging the built-in equity in the home to reduce your upfront costs. This can make it easier to qualify for a mortgage and reduce the amount of cash you need to close.

The family giving the gift will want to speak with a CPA about any tax implications.