The situation
A buyer's uncle agreed to sell a home for $400,000 even though the property was worth approximately $500,000. The buyers initially thought they needed to assemble a large cash down payment plus closing costs.
Why the obvious route did not fit
The buyers approached it like any purchase: save up a large cash down payment, then find more cash for closing costs. That approach ignored the most valuable part of the deal, the roughly $100,000 of equity the uncle was effectively passing to them by selling below value.
The structure that was used
Because this was an eligible family transaction, the equity difference could be structured as a gift of equity, subject to the loan program, appraisal and documentation requirements.
| Item | Amount |
|---|---|
| Approximate value | $500,000 |
| Agreed sale price | $400,000 |
| Gift of equity ($500,000 − $400,000) | $100,000 |
| Applied to required equity / down payment | approximately $85,000 |
| Applied to eligible closing costs | $15,000 |
| Check: $85,000 + $15,000 | $100,000 |
Why the structure mattered
Instead of bringing a large cash down payment plus closing costs, the buyers used the equity their uncle was giving up. Approximately $85,000 of the gift supported the required equity/down payment and $15,000 went toward eligible closing costs, which substantially reduced the cash they had to contribute.
What it means if you are buying from family
When buying from an eligible family member, a properly documented gift of equity can substantially reduce the buyer's required cash contribution. Before you start saving for a full down payment, check:
- Is the seller an eligible family member for your loan program? Eligible donors are defined by each program, so confirm before you sign a contract.
- Will the appraisal support the value? The gift is measured against appraised value. If the appraisal comes in lower, the available equity shrinks.
- Is the paperwork in order? Gifts of equity require program-specific documentation, typically including a signed gift letter, and must appear on the purchase contract and closing documents.
- Which program fits? Compare conventional and FHA rules for gifts and down payment. Official references: Fannie Mae's Selling Guide on personal gifts and HUD's Single Family Housing Policy Handbook 4000.1.
Relevant LoanFight program pages
About these scenarios
These anonymized examples are educational and illustrate financing strategies used in specific transactions. Guidelines, rates, values and results vary by borrower, property, lender and timing.
Historical transaction. Terms, values and results were specific to the borrower and transaction and are not representative of current offers or guaranteed results.
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