How the Gift of Equity Calculator works
A gift of equity happens when a seller — commonly a parent, relative, or other close party — sells a home to a buyer for less than the property's appraised (fair market) value. The unpaid difference is treated as if the seller "gifted" that portion of the purchase price to the buyer, and it can often stand in for cash the buyer would otherwise need to bring to the down payment.
The formula
The core calculation is simple subtraction:
Gift of Equity = Appraised (Fair Market) Value − Sale Price
From there, the calculator expresses the gift as a percentage of the appraised value, works out the loan amount the buyer still needs to finance (sale price minus any additional cash down payment), and divides that loan amount by the appraised value to get a loan-to-value (LTV) ratio. It also adds any additional cash down payment to estimated closing costs (entered as a percentage of the sale price) to approximate cash needed at closing.
Worked example
Take a home appraised at $350,000 that a parent sells to their child for $300,000, with no additional cash down payment and estimated closing costs of 3% of the sale price. The gift of equity is $350,000 − $300,000 = $50,000, which is about 14.3% of the appraised value. The buyer needs to finance the remaining $300,000 sale price, giving a loan-to-value ratio of $300,000 ÷ $350,000 ≈ 85.7%. Closing costs of 3% on $300,000 add about $9,000, so estimated cash to close is roughly $9,000 since the gift itself covers the down payment rather than cash.
What moves the numbers most
- Gap between appraised value and sale price: a larger discount produces a larger gift of equity and a lower loan-to-value ratio, since less of the appraised value needs to be financed.
- Additional cash down payment: any cash the buyer contributes on top of the gift directly reduces the loan amount and therefore the loan-to-value ratio, while increasing cash needed at closing.
- Closing costs: these are paid in cash (or sometimes financed, depending on the loan program) regardless of how much equity was gifted, so they add directly to the estimated cash-to-close figure.
Gift letters and lender documentation
Because a gift of equity substitutes for cash a buyer would otherwise need, mortgage lenders typically require a signed gift letter stating the dollar amount of the gift, the relationship between buyer and seller, and confirmation that no repayment is expected. Loan programs differ on how much of a down payment a gift can cover and whether the donor must be a relative, so treat this calculator's output as the underlying equity math — verify program-specific rules with your lender before relying on the numbers for a real transaction.