From an actual conventional closing
An investment property became the child’s home
Shahram has handled this kind of family purchase multiple times. In this reported closing, parents sold an investment property to their child, who bought it as a primary residence. The parents provided both an equity gift for the down payment and a separate credit toward closing costs and prepaid expenses.
- Purchase price
- $400,000
- Gift of equity for the down payment
- $80,000 20% of the price
- Conventional mortgage
- $320,000
- Seller credit toward costs and prepaids
- $12,000 3% of the price
The down-payment calculation is $400,000 minus $80,000, leaving a $320,000 mortgage. The $12,000 seller credit is a separate part of the closing. It does not reduce that mortgage to $308,000.
Anonymous historical case described by Shahram. The figures describe this transaction, not a current loan offer or a promise of zero cash needed at closing. Actual expenses, credit usage and any required reserves must be reviewed for each purchase.
What happens to the parents’ proceeds?
The parents give up part of what they would otherwise receive from the sale. If the full $12,000 credit is used, $400,000 minus the $80,000 gift and $12,000 credit leaves $308,000 before their mortgage payoff and other selling costs.
That is an illustration using the reported figures, not the parents’ actual net proceeds. Their payoff balance and selling expenses were not provided. Reviewing both sides of the closing helps the family agree on a workable gift before signing the contract.
What is a gift of equity?
A seller gives the buyer a documented credit from the seller’s equity in the property. With an eligible family sale, that credit can satisfy part or all of the down payment instead of the buyer supplying that amount from savings.
For Fannie Mae loans, an eligible equity gift can also cover closing costs and prepaids. It cannot count as financial reserves, which are eligible funds remaining after closing.
Fannie Mae B3-4.3-05: Gifts of Equity
Agree on the purchase price, equity gift and any separate seller credit together. The lender and closing agent need to understand the same arrangement; the contract and closing documents should not tell different stories.
Fannie Mae rules: do parents have to give 20%?
No. There is no separate 20% minimum equity gift. The selected loan determines the required down payment, and an eligible gift can provide some or all of it.
Fannie Mae B3-4.3-05: Gifts of Equity
Some eligible purchases allow 3% down
Fannie Mae offers 97% financing for qualifying one-unit primary residences. Its standard option requires at least one first-time buyer; HomeReady has different eligibility, including an income limit. Automated underwriting, eligible fixed-rate terms, property rules and any education requirement still apply. A family relationship does not waive those conditions.
Fannie Mae: 97% Loan-to-Value Options
Does the child need to contribute personal savings?
For a one-unit primary residence, Fannie Mae does not require a minimum contribution from the buyer’s own funds. At financing above 80%, a two- to four-unit primary residence or second home generally requires 5% from the buyer, with specific exceptions. At 80% or less, no minimum own-funds contribution is required for these eligible property types.
Fannie Mae B3-4.3-04: Personal Gifts
Who can give the equity?
A parent is an eligible relative. Fannie Mae also recognizes other qualifying family and familial relationships. The lender must confirm donor eligibility, including restrictions on affiliation with a builder, agent or another interested party.
Fannie Mae B3-4.3-04: Personal Gifts
Why choose a 20% gift?
Conventional loans generally require mortgage insurance when financing exceeds 80% of the property’s qualifying value. A sufficient equity gift can bring the loan to 80% or below. That can remove PMI, but the lender still evaluates the buyer’s income, credit, debts and the property.
The valuation basis matters: a purchase normally uses the lower of the sale price or appraised value. The reported $320,000 mortgage is 80% of the $400,000 price; a lower appraisal would change that ratio.
Can parents give equity and pay closing costs?
Yes, when the assistance meets the loan rules. In the reported case, the parents gave 20% in equity and a separate 3% seller credit toward costs and prepaids.
For an ordinary seller concession on a Fannie Mae primary-residence or second-home purchase, the financing ratio controls the cap. It is based on the lower sale price or appraised value, not the loan amount.
| Loan-to-value / combined loan-to-value | Maximum contribution |
|---|---|
| Over 90% | 3% |
| 75.01% to 90% | 6% |
| 75% or less | 9% |
At 80% financing with no additional mortgage, the ordinary cap is 6%, not 3%. Credits are also limited to actual allowable expenses; more credit does not mean free cash back.
The equity gift has a different rule
An eligible seller’s gift of equity is excluded from ordinary interested-party contribution limits. Closing-cost help properly documented as part of that qualifying gift can receive the gift treatment. Do not automatically combine an equity gift with an ordinary seller concession and apply one percentage cap to both.
Fannie Mae B3-4.1-02: Interested Party Contributions
Ask the lender and closing agent to reconcile the gift, credits and actual closing costs before you commit to a cash-needed figure.
Can you use an FHA loan with a gift of equity?
Yes. FHA permits equity gifts between eligible family members. A qualifying gift can cover the required down payment. Eligible maximum-financing purchases allow 3.5% down, but a family sale can require more.
HUD Handbook 4000.1: Equity gifts and seller contributions, printed pages 260–261
The family-sale rule can mean 15% down
FHA generally limits a family sale to 85% base financing. The relevant exceptions allow higher financing when the buyer will use the home as a primary residence and buys either:
- The family member’s primary residence.
- A family member’s property where the buyer has been a tenant for at least six months immediately before the sales contract, with written evidence.
For a parent’s rental without that tenancy history, plan on the 85% limit unless another applicable exception is established. A 20% equity gift could satisfy the resulting 15% down-payment requirement, subject to valuation and approval.
HUD Handbook 4000.1: Family-sale financing limits, printed page 180
FHA separately allows seller contributions up to 6% of the price for actual allowable costs and prepaids. Ordinary seller credits cannot satisfy the required down payment.
HUD Handbook 4000.1: Equity gifts and seller contributions, printed pages 260–261
FHA generally charges upfront and annual mortgage insurance even with 20% down. Compare the complete cost and qualification picture with conventional financing; the size of the gift alone does not choose the loan.
HUD: Mortgage insurance premiums for forward mortgage loans
This FHA discussion explains the guidelines. The reported $400,000 closing above was conventional.
Six things to settle before signing the contract
- How you will use the home. Tell the lender whether you will live there. A parent’s former rental and your future primary residence are different occupancy facts.
- The price and equity gift. Ask the lender to review both amounts and the valuation basis before relying on a down-payment percentage.
- The parents’ remaining proceeds. Have the closing agent account for their mortgage payoff, the equity gift, credits and selling expenses.
- Closing costs and prepaids. Specify the separate seller credit, if any. Review expenses paid before closing and money that must remain available afterward.
- Gift documentation. Prepare the donor’s contact details, relationship, gift amount and no-repayment statement. Fannie requires the signed gift letter and settlement statement; FHA requires the donor and buyer to sign and date the gift letter.
- The full loan approval. The gift addresses purchase funds. The lender still has to approve the buyer, property and transaction.
Fannie Mae B3-4.3-04: Personal Gifts
HUD Handbook 4000.1: Equity gifts and seller contributions, printed pages 260–261
Questions about buying a home from your parents
Do my parents have to transfer the equity gift into my bank account?
An equity gift is a credit from the seller’s ownership value at settlement. It is different from a cash gift sent from a bank account. Have the lender and closing agent document the equity credit in the gift letter and closing statement.
Does a 20% gift of equity avoid mortgage insurance?
For a conventional purchase, an eligible gift that brings financing to 80% or less generally removes the need for PMI. The lender uses the lower of the sale price or appraised value. FHA has its own mortgage-insurance rules, even when the equity gift covers 20%.
Can I receive the unused seller credit as cash?
Do not plan on pocketing the difference. A purchase loan has limited permitted refunds, such as documented overpayments of eligible expenses. The lender and closing agent must reconcile the credit against actual costs and the applicable purchase rules.
Can I buy the property as my own rental with a gift of equity?
Fannie Mae’s equity-gift provision covers purchases used as a primary residence or second home, not the buyer’s investment property. The parents having rented it out before the sale is a different fact from how you will use it after buying.
Is a low sale price automatically a gift of equity?
No. The contract, gift documentation and closing statement need to describe the intended transaction. A value above the contract price does not automatically become your down payment; purchase financing normally uses the lower sale price or appraised value.
Can I agree to repay my parents later?
The gift letter must say that repayment is not expected. If your parents expect repayment, tell the lender before signing anything so the arrangement can be evaluated as financing rather than represented as a gift.
Check the family purchase before you write the offer
Tell Mortgage Expert the proposed price, equity gift, seller credit and who will live in the property. Start with the structure, then review what the buyer and seller each need for closing.
For Florida properties. Eligibility depends on verified borrower and property information, the selected program, lender requirements and underwriting.
Guidelines behind this guide
Sources checked October 28, 2026. The FHA references use HUD’s August 12, 2026 handbook. Conventional guidance here follows Fannie Mae; other investors and lenders may have different requirements.
- Fannie Mae B3-4.3-05: Gifts of Equity
- Fannie Mae B3-4.3-04: Personal Gifts
- Fannie Mae B3-4.1-02: Interested Party Contributions
- Fannie Mae: 97% Loan-to-Value Options
- Fannie Mae B2-1.3-01: Purchase Transactions
- Fannie Mae B7-1-01: Provision of Mortgage Insurance
- HUD Handbook 4000.1: Family-sale financing limits, printed page 180
- HUD Handbook 4000.1: Equity gifts and seller contributions, printed pages 260–261
- HUD: Mortgage insurance premiums for forward mortgage loans
Estimates only. Not a Loan Estimate, not an approval, not a commitment to lend, not a rate lock. Final terms depend on verified credit, income, assets, property, loan program, lock date, lender conditions, and actual third-party fees. Mortgage Expert, Inc. · NMLS 2412313 · Equal Housing Opportunity.