Definition
Gift Of Equity
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When the transaction price of a property is considerably less than it’s market value, the difference is considered a gift by the seller.
These types of transactions are common in ownership transfers between family members.
In terms of housing loans, lenders sometimes allow the gift to be classified as a down payment.
This can have a major impact on loan to value and total amount of financing involved.
For example, if an apartment is worth $800,000 and the transaction price is $500,000, the difference of $300,000 converts to a down payment.
For a loan of $500,000, it is effectively a 62.5% LTV.
If the borrower’s personal or household income is able to support a $500,000 loan, the borrower can in theory obtain 100% financing consisting of a gift and mortgage.
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