B3-4.3-11, Trade Equity (12/16/2020)

Trade equity is an acceptable source of funds to supplement the borrower’s minimum borrower contribution provided the following requirements are met:

• The seller’s equity contribution for the traded property must be a true-value consideration supported by a current appraisal.

• The borrower must make the minimum required contribution from their own funds unless:

  • the LTV or CLTV ratio is less than or equal to 80%; or

  • the borrower is purchasing a one-unit principal residence and meets the requirements to use gifts, donated grant funds, or funds received from an employer to pay for some or all of the borrower's minimum contribution. See B3-4.3-04, Personal GiftsB3-4.3-04, Personal Gifts; B3-4.3-06, Grants and Lender ContributionsB3-4.3-06, Grants and Lender Contributions; and B3-4.3-08, Employer AssistanceB3-4.3-08, Employer Assistance, for additional information.

These requirements apply to all transactions that involve property trades, including those that are evidenced by two separate contracts that have the buyer and the seller on one contract reversing roles on the second contract.

Note: Trade equity is entered in the loan application as a credit to the transaction, which will reduce the borrower’s required funds to close.

The equity contribution is determined by subtracting the outstanding mortgage balance of the property being traded, plus any transfer costs, from the lesser of either the property’s appraised value or the trade-in value agreed to by both parties.

For trade equity requirements for manufactured housing, see Section B5–2–03, Manufactured Housing Underwriting Requirements.

For real property, the transfer deed must be recorded.

In addition, lenders must obtain the following:

• A search of the land records to verify the ownership of the property and to determine whether there are any existing liens on the property.

• Proof of title transfer and satisfaction of any existing mortgage liens for which the borrower was liable.