Gift of Equity Calculator (family home sale below market value)

Understanding the gift of equity calculator — concept and principle

This calculator works out a gift of equity, when a family member sells you a home below its market value, and how it fits into the mortgage: the gift amount, its share of market value, the loan amount, the loan-to-value ratio on market value, your equity on day one and any extra cash needed to reach the lender's required equity. Use it when planning a family home sale.

How it is calculated

• Gift of equity = market (appraised) value − agreed price.
• Loan amount = agreed price − your own cash.
• Loan-to-value (LTV) = loan ÷ market value.
• Equity on day one = market value − loan.
• Extra cash needed = max(0, required equity % × market value − equity on day one).

The principle

When a relative sells below market value, the difference is effectively a gift of part of the home's equity. Lenders that allow this usually count the gift as part or all of the down payment, measuring the loan against the full appraised value. So the buyer may need little or no cash for the down payment. Lenders normally require an appraisal and a signed gift letter, and closing costs still apply. The gift can also have tax consequences for the seller.

Worked example

Default inputs: market value $400,000, price $340,000, your cash $0, required equity 5%.

1. Gift of equity = 400,000 − 340,000 = $60,000.
2. Gift as a share of market value = 15%.
3. Loan = 340,000 − 0 = $340,000; LTV = 340,000 ÷ 400,000 = 85%.
4. Equity on day one = 400,000 − 340,000 = $60,000 (15%).
5. Required equity 5% = $20,000, already covered: extra cash needed $0.

How to read the result

An LTV of 85% means the gift alone provides 15% equity, enough for many loan programmes without a cash down payment. At 80% LTV or below, many conventional loans avoid mortgage insurance. Plan separately for closing costs, which the gift usually cannot cover directly.

Common mistakes

• Using the agreed price instead of the appraised value for LTV.
• Forgetting the gift letter and appraisal requirements.
• Ignoring the seller's possible gift-tax and capital-gains consequences.
• Assuming every lender or programme accepts a gift of equity.

Frequently asked questions

What is a gift of equity?

The discount a family member gives when selling you a home below market value.

Can a gift of equity be the down payment?

Many lenders allow it to count toward the down payment, with an appraisal and gift letter.

Does the seller owe tax on a gift of equity?

Possibly; gift and capital-gains rules depend on the country and amounts involved.

Sources: Standard mortgage arithmetic: gift of equity = market value − sale price; LTV measured on market value (lender and tax rules vary)