Sometimes when a borrower wants to buy a property with an FHA mortgage, it’s a situation where the applicant has been renting for some time and has an offer from the landlord to purchase. FHA loans do permit these transactions but there are special rules that govern them.
These rules, published in HUD 4000.1, state that in some cases a higher down payment is required. But in others an exception to that requirement is possible depending on the relationship between landlord and tenant.
The higher down payment requirement is needed because tenant/landlord sales can fall under something known as the “identity of interest” rule, which requires a 15% down payment in cases where identity of interest applies.
According to HUD 4000.1:
“The maximum LTV percentage for Identity-of-Interest transactions on Principal Residences is restricted to 85 percent. The maximum LTV percentage for a transaction where a tenant-landlord relationship exists at the time of contract execution is restricted to 85 percent.”
Naturally, the question that follows is, “What about the exceptions? Who is eligible for one?” According to HUD 4000.1 the following transactions are exempt from the higher down payment requirements:
–Family member purchasing from other family
–A builder’s employees purchasing from the builder
–Corporate transfer purchase (related to the company buying a home for a relocating employee)
–Existing tenants buying from landlords (with an existing lease for at least six months residency prior to purchase)
In these cases, normal FHA down payment rules apply. The minimum 3.5% cash investment rule applies and if a borrower’s FICO scores are not high enough to qualify for maximum financing, higher down payments may be required regardless of the exception to the identity of interest requirements.
Discuss your specific needs with a loan officer to determine what may be possible in your circumstances and remember that your lender may require additional documentation in cases where proof is necessary to establish an exemption based on the information given above.
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