Buying a Family Home: How Gifted Equity Becomes Your Down Payment

Buying or selling within the family can feel complicated. Everyone wants it to be fair, nobody wants to blow up relationships, and on top of that the mortgage rules are not exactly simple.

One tool that quietly solves a lot of these problems is something called gifted equity.

What is gifted equity (in plain language)?

Normally, when someone buys a home, they need a cash down payment. That usually comes from their own savings. But there is another option: a gift.

That gift can come in two forms:

•          Cash (money gifted for the down payment), or

•          Gifted equity (using the equity in a family owned property instead of cash).

Most people know about gifted cash. Far fewer realize that gifted equity is even an option.

How gifted equity works:

Let us say a property is worth $500,000.The parents decide they want to sell it to their kids for $400,000. That $100,000 difference between what the home is worth and the agreed sale price is the gifted equity.

From the lender’s point of view, that $100,000 can be treated like a gifted down payment. Instead of the kids needing to show that they have cash sitting in a bank account, the down payment is coming from the equity the parents already have in the home.

Is it still a “real” sale?

Yes. This is still a legitimate sale, not just a paper shuffle.

You still need a proper purchase agreement. In a family sale like this, we usually have the purchase agreement drawn up after we know the important details:

•          an estimated value of the home for the application, and

•          the price the family member wants to sell for.

In many cases, the lender will also require an appraisal to confirm the actual market value. When that comes in, sometimes the numbers need a little adjusting.

Because of that, it is usually smart not to sign anything final in ink until we have seen the appraisal and know the lender is comfortable with the setup.

In these situations, the purchase agreement is typically drafted by a lawyer. Since it is a family sale and the negotiation is happening between the two parties directly, a realtor often is not involved, but a realtor can be involved if the family prefers.

The gift letter piece:

Just like with a cash gift, lenders still want to see a gift letter.

•          Each lender has their own version of this form, same idea, just with their logo on it.

•          Both parties sign it.

•          It confirms that the amount being gifted, whether cash or equity, is truly a gift with no expectation of repayment.

That signed gift letter is what satisfies the lender’s down payment requirement, even though the buyers are not bringing in traditional cash savings.

Who can use gifted equity?

Gifted equity is not just for parents selling to their kids. It can work in a lot of different family setups, as long as the right relationship is there for the lender.

Some common examples:

•          Parents selling a home to their children

•          Children selling a home to their parents

•          One sibling buying out another sibling’s share

•          Grandparents selling to grandchildren

Most lenders want the sale to be between immediate family members. That usually means:

•          parents

•          children

•          siblings

Once you get into aunts, uncles, cousins or more extended family, it gets trickier. It is not always an automatic no, but they are not considered immediate family by many lenders, and that can limit your options.

This is one of the big reasons it is important to talk to a broker before anyone signs anything.

The exact family relationship between the buyer and seller can literally be the difference between:

•          getting an approval, or

•          having the deal declined.

It just needs to be explained properly to the lender, with the right paperwork and structure from the start.

Do not skip the tax and legal advice

One important thing to understand: as mortgage brokers, we do not give tax or legal advice. We can structure the financing, but you will still want to talk to an accountant and a lawyer about whether a gifted equity setup is the right move for your situation.

A few things to be aware of:

•          If you are the one selling the home and you already own another property, or this is not your principal residence, the sale can have tax implications, including possible capital gains tax.

•          There may be estate implications and questions of fairness with other siblings or family members. If one child is getting a deal on the house, you may want to update your will or estate plan to reflect that.

•          From a mortgage point of view, there are usually lots of ways to make a family sale work. From a family and tax point of view, your lawyer and accountant need a seat at the table too.

The big thing is: do not just pick a number that “feels fair” at the kitchen table and sign on it.

Before anyone signs anything:

1.        Talk to a broker to make sure the buyer can qualify and the numbers work for the lender.

2.        Talk to a lawyer and accountant to make sure the plan also works for your taxes, estate and family dynamics.

Getting that advice upfront can save a lot of stress, surprises and awkward family conversations later.

When this strategy is especially powerful:

This kind of family sale with gifted equity can be incredibly powerful, and a lot of people do not even realize it is an option. We have had many clients say, “We did not think this would be possible for us” until we walked through the numbers.

Some situations where this really shines:

•          First time buyers who can not compete on the open marketMaybe you keep getting outbid or priced out, but your parents or another immediate family member own a home they are willing to sell. A family sale with gifted equity can create a path into the market that just does not exist through regular listings.

•          Parents who want to keep the house in the familySometimes the goal is not “highest possible sale price.” The goal is “keep this home with the kids.” Gifted equity lets parents help their kids get in without needing to hand over a big chunk of cash.

•          Families where the parents are ready to downsizeThe parents are ready for a smaller place, and the kids want to take over the family home. A gifted equity setup can make that transition much smoother and more affordable for the buyers.

•          Kids with solid income but not much savedThis is a big one. We see this all the time: strong income, good credit, but not enough saved for a traditional down payment.For many buyers, the down payment is the hardest part. Being able to use equity as the gift instead of cash can be a game changer.

Sometimes the parents themselves do not have a pile of cash sitting around to gift, but they do have equity in their property. Gifted equity is a way to use that equity to help, without needing to liquidate investments or savings first.

How to start the conversation:

Talking about money and houses with family can feel awkward, but it does not have to be a huge dramatic conversation. The goal at the beginning is not to lock anything in. The goal is simply to open the door and get information.

You can keep it very low pressure.

If you are the kids talking to your parents, it might sound like:

“We have been thinking about buying a place, but it is really hard to compete in this market.We were wondering, would you ever consider selling this house to us at some point?We are not asking for a freebie, but we have learned there are ways to structure it that could help both sides.No decisions today, we would just like to understand what it could look like.”

If you are the parents talking to your kids, it might sound like:

“We have been thinking about downsizing in the next little while.Before we list the house on the market, would either of you want to talk to a mortgage broker about what it might look like if you bought it instead?Nobody has to decide anything right now. We just want to explore whether this could work for everyone.”

The key idea is simple:

Information first. Decisions second.

You are not promising anything by having that first conversation. You are simply putting the idea on the table so that everyone can ask questions and then talk to a broker, a lawyer and an accountant before anyone signs anything.

You do not need to be an expert:

You do not need to become an expert in family sales, gifted equity, tax rules or lender guidelines. You just need to know that there are options, and then talk to people who live in this world every day.

If you are thinking about a family sale or even just wondering if this could work in your situation, that is where we come in.

You can:

•          Book a call with me using my Calendly link: https://calendly.com/mortgagesbyjill/mortgagechat so we can walk through your specific family setup and see what is possible, or

•          Send me an email: jill@mortgagesbyjill.ca if you are just thinking out loud right now and want to talk about next steps and possible scenarios.

You bring the family and the questions. We will help with the structure, the numbers and what the lenders will actually say yes to.