I have read this in your original reply "This gain is computed with each principal repayment and not only at the sale of the home."

So I need to go back and calculate the gain in each month on the principal amount  (not interest) and calculate gain to add in the total gain. as the loss is not allowable anyway. right? 

No, it is not right.  I don't think you can rationalize to yourself (or to your client) this is what he/she has for foreign currency gain.  You may like to do a bit more research. 

I have read on about 10 different places and they have calculated the gain same way I showed in my calculation. If you think it is wrong, could you please explain specifically what is wrong with this calculation and how can I calculate it correctly?