January 27, 2017
Do you know how FHA loan rules affect the sale of a home deemed an “identity of interest” transaction? A reader asks, “My husband and I have a contract to purchase his parents home that they currently live in. This is their principal residence.”
“My loan officer is telling me that even though it is their principal residence and we are purchasing as our principal residence that the 85% LTV cannot be exceeded and we have to put 15% down. Is this correct?? If not, then what can I do to get them to make the exception? We were already pre-approved for 3.5% down.”
FHA loan rules governing identity-of-interest transactions do feature a higher down payment requirement in many cases. HUD 4000.1 defines such transactions as follows:
“An Identity-of-Interest Transaction is a sale between parties with an existing Business Relationship or between Family Members. Business Relationship refers to an association between individuals or companies entered into for commercial purposes.”
“Family members” has a broad definition in this section, and can include in-laws, domestic partners, adopted family members, “regardless of actual or perceived sexual orientation, gender identity, or legal marital status”.
The reader’s question is answered in part by this portion of the FHA loan rules in HUD 4000.1:
“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.”
State law, and lender standards may apply in cases like these but according to the FHA loan rule book those who meet the exception’s requirements would not be required to make a 15% down payment. This information is found on pages 153 and 154 of HUD 4000.1, which is available on the FHA official site at FHA.gov.
Speak to a loan officer for further clarification of this FHA loan rule governing identity of interest transactions, and how the laws of the state where your loan is taken out may affect the mortgage.