Gift Of Equity

The term gift of equity is used to describe the difference between market value and purchase price of a transaction when the latter is lower than the former.

In the open real estate market, barring extraordinary circumstances, seldom do transactions take place below market value.

But these event occur frequently in transactions between family members. And the difference can be quite huge.

Lenders can usually allow gifts of equity to be accounted as down payment, enabling the borrower to obtain 100% financing.

For example, a house appraised at $150,000 has a sale price of $90,000. The lender comfortably loans out $90,000 (60% LTV) to the borrower.

This results in the borrower not having to pay any cash as down payment. But technically, the down payment of $60,000 has already been made in the form of gift of equity.