What do you need to know about FHA loan down payment rules and identity of interest transactions? We’ve been covering this topic more recently due to some reader questions about how it all works; we’ve noticed some confusion about the rules in this area and who those rules apply to.
FHA identity of interest transaction rules are specifically for borrowers who have a family or business relationship with the seller. In such cases, the general rule is that a 15% down payment is required. The confusion comes in over who this applies to.
FHA Loan Rules For Down Payments When The Seller Is A Family Member Or Business Associate
Because identity of interest transactions require a higher down payment, naturally borrowers want to know if there are exceptions and how they may be obtained. Who is exempt from paying a 15% (of the adjusted value of the home) down payment when the seller is a family member or colleague?
HUD 4000.1 states:
“The 85 percent LTV restriction may be exceeded if a Borrower purchases as their Principal Residence:
-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.”
Note that in the two instances mentioned above, the family member relationship is exempt from the identity-of-interest 15% down payment requirement IF the borrower is buying the principal residence of the seller for her own use as a principal residence.
Landlords selling to tenants will need to furnish the required documentation in order for the lender to consider an exemption in those cases.
Borrowers will be required to commit to the FHA’s occupancy rules for such purchases-at least one borrower obligated on the FHA mortgage loan must occupy the home as her primary residence, normally within approximately two months of the closing date.
Other Exemptions From The Identity Of Interest Down Payment Rules
HUD 4000.1 also allows the lender to provide an exception to the 15% down payment requirement in specific circumstances as described below:
Builder’s Employee Purchase
The 85 percent LTV restriction “may be exceeded if an employee of a builder, who is not a Family Member, purchases one of the builder’s new houses or models as a Principal Residence”.
The 85 percent LTV restriction in this case, “may be exceeded if a corporation transfers an employee to another location, purchases the employee’s house, and sells the house to another employee”.
The 85 percent LTV restriction may be exceeded for these transactions when “the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the sales contract”.
Additional lender standards, state law, and other ordinances may apply above and beyond the FHA home loan rules mentioned here. Some lenders will not offer certain types of home loans or transactions depending on market conditions and other factors. Ask your loan officer if the FHA home loan you seek is available from that financial institution.