Trade Equity
Trade equity refers to using the value of one property to help buy another property. This is usually done through a trade-in process, similar to trading in a car when buying a new one. For home buyers, this means if you have a property and you’re looking to buy another one, you can use the value of the property you currently own as part of the payment for the new property. However, there are specific rules to follow for this process to be accepted by lenders.
Calculating the Equity Contribution
To figure out how much your trade-in property is worth towards buying the new property, you first need to know how much money is still owed on the traded property if there’s a mortgage. You also need to account for any costs that come from transferring the property to someone else. After you know these amounts, you subtract them from the lesser of two values: the appraised value of the property (how much a professional thinks it’s worth) or the trade-in value agreed upon by both you and the person you’re trading with.
For those looking to trade in a manufactured home, there are additional rules found in Section B5–2–03, Manufactured Housing Underwriting Requirements of the Fannie Mae Selling Guide.
Documentation Requirements
When trading real estate properties, the deed (the document that proves you own the property) must be officially recorded to show the transfer. Lenders will also need to check public records to make sure you truly own the property and to see if there are any debts or liens (claims from others) on the property. Plus, they’ll need proof that the title of the property has been transferred and that any debts or mortgages you were responsible for have been paid off.
Introduction
When you’re buying a new home and you want to use the value of a property you already own to help with the purchase, this is known as trade equity. This guide explains how you can do this, including how to figure out how much your property is worth for the trade, and what documents you need to provide.
Trade Equity
You can use trade equity as part of your payment when buying a new home, but there are conditions:
– The value of the property you’re trading must be confirmed with a current appraisal.
– You must still contribute a minimum amount of money from your own funds to the purchase unless:
1. Your loan value compared to the new property’s value (LTV) or the combined loan values on the property (CLTV) is 80% or less.
2. You’re buying a single-unit home to live in and you qualify to use gifts, grant funds, or employer assistance for the purchase. Refer to sections B3-4.3-04 (Personal Gifts), B3-4.3-06 (Grants and Lender Contributions), and B3-4.3-08 (Employer Assistance) for more details.
These rules apply even if the property trade involves two separate agreements where you and the seller swap roles for each property.
Note: In the loan application, trade equity is listed as a credit, which means it lowers the amount of money you need to bring to the closing of the sale.
Calculating the Equity Contribution
The value of your trade-in property is calculated by taking the lower value between the appraised value or the agreed trade-in value and subtracting any remaining mortgage balance and transfer costs. For those trading manufactured homes, see the specific section mentioned above for details.
Documentation Requirements
When trading properties, the deed must be legally recorded to show the new ownership. Lenders will need to:
– Check public records for the property’s ownership and any debts/liens.
– Get proof that the property’s title has been transferred and all related mortgages or liens have been settled.
Recent Related Announcements
The guidelines mentioned here were part of an update given on December 16, 2020, under Announcement SEL-2020-07. This announcement is related to the trade equity topic and contains important information for both buyers and lenders.
References
For more details, visit Trade Equity of the Fannie Mae Selling Guide.