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Do NOT need 30% Equity Cushion in Departing Residence

There is a concern among many of our Realtors about the necessity of a 30% “Equity Cushion” in a borrower’s departing residence (the “departing residence” is the house a buyer is moving out of). Such a cushion is NOT a necessity.

The 30% Equity Cushion is only a requirement if we need to use the future rent from the departing residence for income. If there is not a 30% Equity Cushion, we must hit the borrower for the entire payment from the departing residence with NO offset from rent.

This is a common occurrence, but we are discovering that with rates so low and FHA tolerating high debt ratios and co-signers, many of our clients are able to qualify for a new home purchase even if we have to include their current home in debt ratios.

A lack of equity in the departing residence also sparks concerns about “buy and bailing” (lenders will NOT approve new financing if they suspect a “buy and bail” is in the works). We, however, have always assuaged these concerns at the lender level with strong “motivation for moving” letters that we help our borrowers write.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167