Does FHA allow borrowers to use equity resulting from a trade of real property toward the cash investment?

Trade Equity refers to when a Borrower trades their real property to the seller as part of the cash investment.   
The amount of the Borrower’s equity contribution is determined by: 
• using the lesser of the property’s appraised value or sales price; and 
• subtracting all liens against the property being traded, along with any real estate commission.   

If the property being traded has an FHA-insured mortgage, assumption processing requirements and restrictions apply.   

The Mortgagee must obtain a residential appraisal report complying with FHA appraisal policy to determine the property’s value and must also obtain the Settlement Statement or similar legal document to document the sale of the property.   

For additional information see Handbook 4000.1 II.A.4.d.iii(S) or II.A.5.c.iii(S) available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04281