• Case Scenarios

  Buying a House Under a Gift of Equity

  Posted by Angela on July 20, 2026 at 7:03 pm

  Can we go over a case scenario on a gift of equity home purchase? Homeowners (Let’s call them John and Jane Doe) of a nice two-bedroom and two-bath condominium; the property is worth $320,000, and the mortgage on the property is $180,000. John and Jane Doe are in a current Chapter 13 bankruptcy repayment plan and have been in the plan for a year. However, the bankruptcy payments to the trustee are in arrears by 4 months, and they cannot refinance. The good news is that John and Jane Doe have a 45-year-old married son (Let’s name him Junior) with a child who is renting and wants to buy John and Jane Doe’s condo. John and Jane Doe are willing to sell the condo to Junior for 10% below the appraised value, which is $320,000 x 0.90%, $288,000. The cash proceeds to John and Jane Doe are $ 288,000- $ 180,000, or $108,000. With the cash proceeds, John and Jane Doe want to buy out the Chapter 13 Bankruptcy ($40,000) and use the proceeds to buy another property (hoping the arrears in bankruptcy will be paid off, re-establish credit, and let the voluntary bankruptcy dismissal season pass so they can qualify for a home purchase mortgage). How would this work? Can you please advise a step-by-step process for the above case scenario?

  Tina replied 1 day, 13 hours ago 2 Members · 1 Reply

  • Gift of Equity Home Purchase
• 1 Reply

• 

  Tina

  Member

  July 20, 2026 at 8:59 pm

  A Gift of Equity Purchase from Sellers in Chapter 13

  Yes, this transaction may be possible, but unlike most parent-to-child sales, John and Jane are selling property while they are in active Chapter 13 bankruptcy, 4 months delinquent on payments to the trustee, and want to transfer $32,000 of equity to their son.

  This Means That 2 Approvals are required:

  1. Junior’s mortgage lender must approve the gift-of-equity purchase.
  2. The sale, the family tie, the equity gift, and the allotment of the sale proceeds must be approved by the bankruptcy trustee and the bankruptcy court.

  John and Jane should not sign a binding purchase and sale agreement, convey title, or receive sale proceeds until their bankruptcy attorney has reviewed the transaction as a whole.

  First, the Gift-of-Equity calculation must be corrected.

  The calculation should be $320,000 x 0.90, or $288,000.

  Equity calculations should not be expressed as a percentage of 0.90, since that is less than 1%.

  The property has the following estimated position:

  • Appraised Value: $320,000
  • Existing Mortgage: $180,000
  • Total Gross Equity: $140,000
  • Proposed Gift of Equity: $32,000
  • Gross Equity Remaining for John and Jane: $108,000

  The $108,000 is not the total cash proceeds. It will be reduced by the bankruptcy court-mandated payment to the trustee, additional liens, conveyance costs, estate costs, and possible loss on the sale.

  The Purchase Contract Should Probably Show $320,000, Not $288,000

  This is likely the most critical aspect of the transaction.

  We typically would see the following for a cleaner gift-of-equity structure.

  • Purchase price: $320,000
  • Gift of equity from John and Jane: $32,000
  • Junior’s mortgage loan: $288,000
  • Cash received by John and Jane before expenses: $288,000
  • Mortgage payoff: $180,000
  • Gross remaining proceeds before expenses: $108,000

  A gift of equity is when a seller provides a buyer with equity in the form of a credit. Fannie Mae acknowledges a gift of equity for the purchase of a principal residence and allows a gift of equity for the down payment, closing costs, and prepaid items. Gifts of equity must be outlined in a gift letter and in the settlement statement.

  Potential Issues with a $288,000 Contract

  For most conventional purchase loans, the loan-to-value ratio is based on the lesser of the purchase price and the appraised value.

  Let’s say the contract states $288,000, and Junior is looking for a 90% conventional loan. The lender would conclude that the purchase price for the LTV is $288,000, and the maximum 90% loan amount would be $259,200. Therefore, the down payment would be $28,800.

  Even though the property appraised for $320,000, a $288,000 first mortgage would be restricted under the traditional lower-of-price-or-value calculation. Assuming John and Jane also provided Junior with a gift of equity in the amount of the $28,800 down payment, the buyer’s lender would provide a loan of $259,200, and after John and Jane paid the $180,000 mortgage, they would have approximately $79,200 in cash remaining.

  If John and Jane should receive around $288,000 before expenses, the contract would show a $320,000 price with a $32,000 gift-of-equity credit, disclosed separately. That structure would need approval from the lender, the bankruptcy lawyer, the title company, and the court.

  Step-by-Step ProcessStep 1: Contact the Bankruptcy Attorney Before Writing the Contract

  The bankruptcy attorney for John and Jane will need to be contacted first.

  A Chapter 13 debtor has some ability to sell their own property. However, if it is a sale outside the ordinary course of business, it will still need to be noticed and approved by the court.

  The Attorney Should Be Asked:

  • Is the condominium still part of the bankruptcy estate?
  • Was it claimed as an exempt asset?
  • Does the confirmed plan allow or restrict a sale?
  • Would the proceeds have to be paid to the bankruptcy trustee?
  • Would state homestead exemptions cover any of the proceeds?
  • If so, could John and Jane use the protected proceeds to buy another principal residence?
  • Would the four-month delinquency automatically trigger a motion by the trustee to dismiss?

  The sale also cannot be used to remove property or equity from the bankruptcy estate if it is not disclosed.

  Step 2: Obtain All Current Payoff and Bankruptcy Figures

  Use caution when using the estimated Chapter 13 balance of $40,000 as the actual payout amount.

  John and Jane’s lawyer should acquire:

  • the trustee’s current payment ledger,
  • the exact amount due for the 4-month delinquency,
  • the list of creditor claims allowed,
  • the current remaining plan base,
  • the plan completion amount,
  • the remaining bankruptcy attorney fees,
  • the Bankruptcy Trustee fees and/or commission,
  • the remaining Priority claims, be they Support or Taxes,
  • the secured claims paid through the plan,
  • the current mortgage payoff,
  • the HOA or condo liens,
  • the property tax,
  • the remaining Judgment liens, or other Federal tax or Title liens.

  The remaining plan payments do not address the amounts the Trustee or the Court may require after a sale of the property. Chapter 13 Unsecured Creditors must receive at least the same amount as they would under a Chapter 7 liquidation. A confirmed plan may be modified.

  Step 3: Remedy the Four-Month Deadbeat Trustee Situation, Without Delay

  Four delinquent Chapter 13 Plan payments are a major concern.

  Failing to meet the confirmed plan obligations may constitute a material default and may lead to either dismissal or conversion of the case. Federal bankruptcy guidance states that failure to make required plan payments will likely result in either dismissal of the case or conversion to Chapter 7.

  The bankruptcy attorney may provide one of the following options to solve the issue:

  • Make the four missed payments before the sale is requested.
  • Enter into a cure agreement with the trustee.
  • File a motion to modify the Chapter 13 plan.
  • Request temporary abatement or other permitted relief.
  • Request the trustee to allow the arrears to be paid at closing.

  Because of the pending motion to dismiss the case, John and Jane need to solve this issue before the scheduled closing date to make the court more willing and able to approve the sale.

  Preapprove Junior Before Filing the Motion to Sell

  Before John and Jane spend money on a request to the court, Junior preapproved with a properly underwritten mortgage.

  Items the lender must assess include:

  • Junior’s credit report
  • Junior’s Income and employment history
  • Junior’s debts
  • Junior’s bank statements and reserves
  • Junior’s future plans for owner occupancy
  • Child support and other obligations
  • The condominium’s financial and insurance condition
  • HOA dues and special assessments
  • The condominium project’s loan program eligibility
  • The non-arm’s-length family relationship
  • The proposed gift of equity
  • The sellers’ Chapter 13 bankruptcy

  Due to project issues such as insurance, assessments, special assessments, owner-occupancy, and other project issues, a condominium can potentially satisfy the requirements of one loan program and not another.

  Step 5: Choose Junior’s Loan Program

  Conventional Gift-of-Equity Option

  Fannie Mae provides the family with a gift of equity to finance a primary or secondary residence. The equity gift can cover the entire down payment, provide equity to pay closing costs, or cover advances. The equity gift cannot be considered a financial reserve. A signed gift letter, along with the equity gift settlement, is to be presented.

  An Elementary Example of a Conventional Loan May Be:

  • Price of the home: $320,000
  • Gift of equity: $32,000
  • Junior’s loan: $288,000
  • Loan-to-value: 90%

  Junior’s Other Closing Funds

  • Depends on lender credits, seller-paid costs, prepaid taxes and insurance, and other closing costs.
  • Junior will qualify for the $288,000 loan.

  FHA Gift-of-Equity Option

  FHA allows family members to use equity credit as a gift when one family member sells a house to another. FHA usually has limitations on certain identity-of-interest transactions. However, the higher-financing restriction can be overlooked when a borrower purchases the principal residence of another family member as the borrower’s new principal residence.

  FHA Lender Would Still Need to Confirm:

  • Junior will use the condo as his principal residence.
  • The gift is real, and there is no requirement to repay the gift.
  • The family member is a relative.
  • The value of the gift.
  • The condo is eligible for FHA insurance.
  • The gift from the bankruptcy estate has been approved by the court.

  Even though the FHA allows a gift to be used as a source of mortgage funding, the court may still limit the gift to $32,000.

  Step 6: Get a Separate Appraisal

  This sale is between a parent and their son, which makes the appraisal even more important.

  The Bankruptcy Attorney May Require:

  • A full separate appraisal
  • A market analysis
  • Recent sales of comparable condos
  • A description of how the estate will benefit from this sale
  • Evidence supporting that $320,000 is a defensible value.
  • An estimation of the sale price

  The trustee will likely take a close look at this sale because Junior is a related buyer rather than an unrelated buyer.

  We need to determine how to respond to the question: Why should John and Jane gift $32,000 worth of estate equity, given that they are four months overdue on their bankruptcy payment obligation?

  The Court, in This Case, Could Do Any of the Following:

  • Allow the entire $32,000 equity gift.
  • Allow a smaller amount.
  • Demand that Junior pay the full fair market value.
  • Demand that the gift amount be paid to the trustee.
  • Demand that all nonexempt funds pay the Chapter 13 plan
  • Allow the transaction to close.

  Step 7: Write the Contract with the Proper Contingencies

  The contract must be drafted by an experienced real estate attorney or an agent working with the bankruptcy attorney.

  The Contract Must Include the Following:

  • $320,000 purchase price
  • $32,000 gift of equity
  • Relationship of the parties
  • Sellers are in Chapter 13
  • The transaction must be approved by the bankruptcy court.
  • The transaction must be approved by Junior’s financing.
  • The transaction must be approved by appraisal and title.
  • The condo must meet the lender’s requirements.
  • All proceeds are to be paid as directed by the bankruptcy court.
  • No side agreements, no repayment obligations

  The contract must not require John and Jane to complete the transaction if the bankruptcy court does not approve the gift.

  Step 8: Prepare an Estimated Closing Disclosure

  The title company must prepare an estimated closing disclosure prior to the filing of the motion.

  The Preliminary Calculation May Look Like This:

  The purchase price is $320,000. With the $32,000 gift of equity, the actual consideration to the sellers is approximately $288,000.

  The Title Company Would Pay $288,000, Less the Following:

  • $180,000 mortgage payoff
  • Property taxes
  • HOA Balances and Assessments
  • Title and Settlement Expenses
  • Transfer or Recording Charges
  • Real Estate Commissions
  • Seller Attorney Fees
  • Other Liens
  • The amount to be paid to the Chapter 13 Trustee

  John and Jane may not expect to receive $108,000 or have $68,000 after paying an estimated $40,000 bankruptcy balance.

  Step 9: File a Motion to Sell With the Bankruptcy Court

  The Motion Would Usually Contain the Following:

  • Identity of the Buyer
  • Buyer’s Relationship to John and Jane
  • Appraisal
  • Purchase Price
  • Gift of Equity
  • Mortgage Payoff
  • Closing Costs
  • Net Proceeds
  • Payment to the Trustee
  • Amount Retained by John and Jane
  • Allowable Purpose of Retained Funds
  • Intentions Regarding Chapter 13 Case (Complete, Modify, or Dismiss)

  All creditors and the trustee shall be given notice and an opportunity to be heard. Local rules will dictate the timing and required documents for the motion.

  Step 10: Get a Detailed Court Order Before Closing

  A court order should be detailed enough for the title company.

  It Should Include:

  • Permission to sell the condominium
  • Permission to sell to Junior
  • Approval or denial of the $32,000 gift
  • Payment of the current mortgage and liens
  • Payment of the Chapter 13 trustee
  • Treatment of the delinquent trustee payments
  • Court order on whether the proceeds must be held in escrow
  • Court order on how much John and Jane may retain
  • Court order on whether the retained amount is still exempt
  • Court order on whether the Chapter 13 plan must be modified
  • Court order on whether the trustee will allow the case to be closed

  The title company must send the required bankruptcy funds to the trustee. The order must limit the amount of funds sent to John and Jane.

  Step 11: Complete Junior’s Purchase

  At Closing:

  • Junior executes the mortgage documents.
  • The lender funds the approved mortgage.
  • The Closing Disclosure or settlement statement reflects the gift of equity.
  • The title company pays the mortgage and closes the other liens and closing costs.
  • The trustee receives the required court amount.
  • The remaining court-ordered funds are released to John and Jane.
  • Junior takes the title to the condominium.

  The parents must not receive the funds and decide how much to send to the trustee. The court order and settlement statement must govern distribution.

  Step 12: Decide Whether to Complete or Dismiss Chapter 13

  John and Jane likely will not want to dismiss their Chapter 13 case following the sale.

  Completing the Plan and Receiving a Discharge

  Using the Court-Approved Proceeds May Lead to a Better Long-Term Outcome By:

  • Curing the delinquency
  • Paying the trustee the required amount
  • Completing or modifying the plan
  • Receiving a Chapter 13 discharge
  • Keeping the court-allowed exempt proceeds

  A discharge may allow a better future timeline to obtain a conventional mortgage than a dismissal.

  If Going Through Fannie Mae, Applicants Usually Have to Wait:

  • Two years after a Chapter 13 discharge
  • Four years after a Chapter 13 dismissal

  A two-year wait after a dismissal may only be justified if documented extenuating circumstances are provided. (Fannie Mae Selling Guide)

  Voluntary Dismissal of the Case

  Under federal law, a Chapter 13 debtor may request a voluntary dismissal if the case has not been converted from a different chapter. Dismissal of the case will end the bankruptcy case, and dismissal will not discharge the case. Creditors will be able to reassert their claims.

  If John and Jane are Considering Dismissal, They May want to Think About:

  • which debts they will still owe
  • whether dismissal will allow creditors to assert claims again
  • whether judgments or garnishments will return
  • whether creditors will be able to claim the sale proceeds
  • whether their mortgage application waiting period will change
  • whether dismissal will impact a future bankruptcy filing

  Can John and Jane Buy Another Home Right Away?

  Most likely not with new traditional financing, given the situation. According to FHA regulations, debtors still in a Chapter 13 case can obtain a home mortgage after the repayment plan has been in place for at least 12 months if the debtor has made all plan payments promptly and has received permission from the bankruptcy court to close the mortgage.

  John and Jane have been late on payments to the bankruptcy trustee for the last four months. Making the payments would perform the financial contract, but it will not remove the late payments.

  The bankruptcy court or a third-party lender may require a satisfactory payment history, completion of the bankruptcy, or an additional seasoning period.

  They may be court-approved to use exempt proceeds from the condo sale to purchase another property for cash, but buying a replacement property while the Chapter 13 is still active should be done with extreme caution and in coordination with their attorney and trustee. Chapter 13 debtors are warned to exercise extreme caution when incurring new debts, as doing so without notice to the trustee can have serious consequences.

  Gift Tax Analysis of the $32,000 Gift

  Federal tax may treat a sale of property to a family member at a price that is less than the fair market value as a partial sale and a partial gift.

  For 2026, the annual federal gift-tax exclusion is $19,000 per donor and per recipient.

  If John and Jane transfer equal shares of the property to Junior and each gifts $16,000 of the equity, the gift to Junior will not exceed the gift tax exclusion. However, due to other gift tax considerations and Junior’s spouse, the outcome may change.

  Because the sale will be partially a gift, Junior’s tax basis may be affected. The family should retain a CPA or tax attorney to review the Sale and Gift Agreement.

  Most Viable Approach for the Family

  The most defensible approach would be:

  1. Immediately pay all four delinquent trustee payments.
  2. Obtain the trustee’s official claim payoff and complete claims.
  3. Preapprove Junior and confirm the condominium meets the requirements.
  4. Order a $320,000 fee simple, unrestricted, and completely independent appraisal.
  5. Draft the sale agreement at $320,000 with a completely disclosed gift of equity for $32,000.
  6. Make the sale agreement contingent upon approval of the bankruptcy court.
  7. Request that the court authorize the sale, the gift, and dictate how proceeds will be allocated.
  8. Pay the mortgage, closing costs, and the bankruptcy amount ordered by the court directly via the title company.
  9. Make every effort to complete the Chapter 13 plan and receive a discharge; do not voluntarily dismiss the Chapter 13 plan.
  10. Only utilize the remaining court-approved exempt funds for John and Jane’s next home.

  Uncertainties exist surrounding whether: 1. mortgage guidelines will permit Junior to receive a gift of equity (generally, they do), and 2. the bankruptcy court will allow John and Jane, as Delinquent Chapter 13 Debtors, to transfer $32,000 to their son when the creditors are still owed money. The answer to these questions will lie with John and Jane’s bankruptcy attorney, the Trustee, and the bankruptcy judge.

  In Chapter 13, debtors have more control over their post-petition right to property and funds than under other bankruptcy filings.

  • This reply was modified 1 day, 6 hours ago by  Sapna Sharma.

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