The Dutchman informed City's hierarchy of his decision on New Year's Day and told the players on Tuesday morning, when the club made the news public.
Van't Schip, 53, said it was a simple, if tough, decision to make.
"I have been faced with a choice between my family in Holland and my work here in Australia and there was only one right decision," he said in a statement.
"I did not want my personal circumstances to impact the club in any way.
"I am part of a strong coaching team that has been carefully nurtured over the last three years and that gives me great confidence that this situation will not adversely affect the club's progress.
"The club's development since its creation will always be a source of great personal pride to me."
Assistant Michael Valkanis, in his first season with the club, has become caretaker boss and will coach the club until a permanent appointment is made, beginning with a home fixture with Western Sydney on Friday night.
Van't Schip was the expansion outfit's inaugural coach but left after three seasons due to personal circumstances.
In the wake of John Aloisi's sacking in December 2013, he returned to find a club transformed.
Also-rans Melbourne Heart had become mega-money Melbourne City, and with the help of international signings van't Schip led the club up the A-League table.
He also oversaw the club's first piece of silverware when City won the FFA Cup in November.
Under van't Schip's guidance, City qualified for the finals in the past two campaigns and were on track to do so again, sitting in fourth position.
But given the riches available to him - including the mercurial talents of Aaron Mooy, Bruno Fornaroli and, fleetingly, David Villa - van't Schip has been criticised for under-achievement with two successive semi-final exits.
What isn't in dispute is van't Schip's integrity.
Wrestling with the decision over the past weeks, van't Schip considered both taking a month off or ending his tenure early to attend to his family duties.
Out of contract at the end of the season, he was not considering a contract extension for family reasons.
City chairman Khaldoon Al Mubarak said his decision to put his family first came as no surprise.
"John's reaction to his personal circumstances is testament to the man he is and why he has been such an important contributor to the club's development both on and off the field - culminating in guiding our men's first team to its maiden trophy," he said.
"He has our ongoing gratitude and support as his focus rightly turns to his family."
It is understood the club has only just commenced its search for a new manager.
Van't Schip is the second long-serving coach to quit his post this season after Ernie Merrick left Wellington Phoenix last month amid poor results.