Dear ADJ0819,
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A gift of equity can take several forms. A parent can gift funds to child to offset closing costs. When a seller sells a property for less than the fair market value the difference between the sales price and the fair market value is sometimes referred to as a gift of equity.
In the case of a family gift, the amount is disclosed as an “other credit” in the cost to close section of the Loan Estimate (LE) and the Closing Disclosure (CD).
In the case of a sale for less than market value there are various opinions on the proper method of disclosure. We believe the safest approach is to disclose the contract sales price. The instructions for the LE and CD require the contract sales price be disclosed as “sales price” in a purchase transaction. Consumers purchasing a home for less than the fair market value prefer that the fair market value be shown as the purchase price, since that higher number improves the loan-to-value ratio. Using the higher number results in the “gift of equity.” The TRID regulations and related guidance do not address the disclosure of this arrangement.