A reader got in touch to ask about FHA loans and identity of interest rules this week. “I have a loan that I am working on right now and the underwriter is saying that we have an “identity of interest” issue.”
“The situation is this my borrower is not related to the seller but has been renting the house she is buying for five months. Because there is no family relationship between the seller & buyer, does she has to live in the house for six months?”
The FHA loan rule book, HUD 4000.1, describes identity of interest transactions as a house sale “between parties with an existing Business Relationship or between Family Members.” The word “interest” in this case refers not to interest rates, but rather to the interest the seller has in selling the home to the buyer based on things like a tenant/landlord relationship, business relationship, etc.
These transactions are not forbidden by FHA loan rules, but do require the lender to ask for a higher down payment. HUD 4000.1 explains this by stating:
“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.”
There are exceptions to that rule. The 85% LTV is waived for transactions where the borrower is purchasing “the Principal Residence of another Family Member…or a Property owned by another Family Member in which the Borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
However, in the case of the reader question, the seller is not a family member. Are there exceptions for the identity of interest rules in such cases? Yes, under limited circumstances:
“The 85 percent LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
So the short answer to the reader’s question is that the borrower must live in the property for at least six months before the sales contract agreement. Lender standards, state law, and additional requirements may also apply above and beyond the FHA loan rules mentioned here.