Fannie Mae and Freddie Mac Guidelines for Gift of Equity

 

When a family sells a home to another family member, a gift of equity can be an excellent way to make homeownership possible without a large cash down payment. But because most conventional loans follow Fannie Mae or Freddie Mac guidelines, it’s important to understand how these agencies view and regulate this type of transaction.

While the overall concept is the same under both agencies, there are a few key rules and details to know. This guide explains what each allows, how they align, and what families should keep in mind when structuring a sale that includes a gift of equity.

 

Fannie Mae’s Rules for a Gift of Equity

Fannie Mae’s Selling Guide clearly allows a gift of equity as an acceptable contribution toward a buyer’s down payment and closing costs, as long as certain conditions are met.

Who Can Give the Gift

• The seller must be a family member or someone with a clearly defined, close relationship to the buyer.
• Acceptable relationships include parents, children, grandparents, siblings, aunts, uncles, domestic partners, and others related by blood, marriage, or legal guardianship.
• The seller must not be affiliated with any interested party such as a builder, developer, or real estate agent in the transaction.

Eligible Property Types

• The home being purchased must be a primary residence or second home.
• Gifts of equity are not allowed for investment properties.

How the Gift Can Be Used

• The amount of equity the seller gives can be used toward:
  • The down payment
  • Closing costs
  • Prepaid expenses (like homeowners insurance or property taxes collected at closing)
• However, the gift cannot be counted as the borrower’s required financial reserves (the funds a borrower must keep after closing).

Documentation Requirements

• The transaction must include a gift letter signed by both the buyer and the seller, stating:
  • The amount of the gift
  • The relationship between the parties
  • That repayment is not expected
• The purchase contract must clearly show that a gift of equity is being provided as part of the sale.
• The appraisal must confirm the home’s fair market value, which establishes how much equity is being gifted.
• The closing statement must also reflect the gift of equity amount.

Example:
A parent sells a home appraised at $600,000 to their child for $500,000. The $100,000 difference is the gift of equity, which can be applied toward the down payment and closing costs under Fannie Mae’s guidelines.

 

Freddie Mac’s Rules for a Gift of Equity

Freddie Mac’s rules are very similar to Fannie Mae’s, allowing families to use built-up home equity to help another family member purchase a home.

Who Can Give the Gift

• The seller must be a family member, such as a parent, child, grandparent, sibling, or other close relative.
• Freddie Mac technically allows gifts of equity from certain non-family members who have a long-standing, family-like relationship with the buyer, but these cases are very rare and difficult to document. Lenders typically require extensive proof of the relationship and intent, so most transactions involve family members only.

Eligible Property Types

• The home must be a primary residence or second home.
• Gifts of equity are not permitted on investment properties.

How the Gift Can Be Used

• A gift of equity can be applied toward both the down payment and closing costs, as long as the appraisal supports the value and all required documentation is provided.

Documentation Requirements

• A signed gift letter from the seller confirming the amount, relationship, and that no repayment is expected.
• The purchase contract and settlement statement must clearly reflect the gift of equity.
• A current appraisal must establish the fair market value of the home and confirm that the sale price reflects the equity being gifted.

Example:
Grandparents sell their home appraised at $800,000 to their granddaughter for $720,000. The $80,000 difference serves as a gift of equity. Under Freddie Mac’s rules, that amount can be credited toward her down payment and allowable closing costs.

 

How Fannie Mae and Freddie Mac Compare

Feature	Fannie Mae	Freddie Mac
Who Can Give the Gift	Family member or someone with a clearly defined close relationship	Family member (in most cases). In very rare cases, non-family members with a long-standing, family-like relationship may qualify if proper documentation is provided.
Eligible Property Types	Primary residence or second home	Primary residence or second home
Can Be Used For	Down payment, closing costs, and prepaid expenses	Down payment and closing costs
Investment Property Eligible?	No	No
Repayment Allowed?	No	No
Required Documentation	Gift letter, purchase contract, appraisal, and closing statement	Gift letter, purchase contract, appraisal, and closing statement
Use for Reserves	Not allowed	Generally not permitted

 

What to Keep in Mind

• The appraisal determines the gift amount. The appraised value sets the limit for how much equity can be gifted.
• Clear documentation is essential. The gift letter, purchase contract, and closing documents must all show the equity gift clearly.
• Each lender may have extra requirements. Even when Fannie Mae and Freddie Mac allow a gift of equity, lenders can add their own guidelines or documentation standards.
• Family transactions only. Although both agencies technically allow rare exceptions, nearly all approved gifts of equity come from family members.

 

Next Steps

Understanding these rules is the foundation for completing a successful gift of equity transaction. The next step is learning how to document and finalize the process so it meets lender and underwriting standards.

In the upcoming article, The Process and Documentation Lenders Require for a Gift of Equity, we’ll walk through:

• How the appraisal confirms value
• What to include in the purchase contract
• How to complete the gift letter
• What lenders look for during underwriting

After that, Pros and Cons of a Gift of Equity will explore when this strategy makes the most sense for families.

If you’re considering buying or selling a home within your family, understanding how Fannie Mae and Freddie Mac handle a gift of equity is an important first step toward a smooth transaction.