I am thinking about buying a house from my mother. She has owned it for many years. The house appraises for about $250K, and she is going to sell it to me for $200K. I've talked to a few people that say I need at least a 3 percent down payment. However I don't have $6000 saved up right now. A friend told me I could have my mother write a letter saying she is giving me the equity as a gift and that would take care of the down payment. I've never heard about this.

Can someone explain to me how the gift of equity works, and if it fits my situation.

no actually you should not need either, you ask for a loan, the loan will be based on a percent of the value of the home. So you have the house appraised if it has a value of 250,000 you should have no trouble merely getting a loan for 200,000 if you have good credit

If you show this as a gift, you will have issues of taxes to be paid on the gift. In today's economy it is not uncommom for a 250,000 house to be selling for 200,000 or even less as the market keeps going down.

how much you have to pay out of your pocket will depend upon the true value of the home, your credit rating as to what percent loan you can get.
And then the actual closing costs.

Thanks for the quick reply chuck. I have pretty decent credit, I have a 660+ credit score on all 3 bureaus. It's not the highest, but I don't have any late payments. Just need to get a few credit card balances down which I plan on doing in the next month. I was just worried it would take to long to save up all that money, because I plan on putting the majority of my income towards my credit cards the next few months to get them paid off.

I thought about the tax reprocussions as well, I'm just trying to get into this house in the next few months.

But normally all the loan people want to know, value of home, how much you need, and your credit rating, and income to debt ratio.
So in fact, the equity you get by bying it at a discout is your equity factor protecting the lender.