FHA loans give buyers the option to finance with a down payment as low as 3.5%. There’s even a $100 down payment FHA program, but did you know there are FHA purchases which require a 15% down payment? Too often this surprises buyers. It’s tough when these situations are not caught early by a lender and the rules first arise late in the process. These primary residence purchases with a maximum 85% LTV are called FHA identity of interest transactions. Otherwise known as a non-arm’s length transaction. So, FHA defines this as a sale between parties with an existing relationship such as transactions with the following:
- Family members
- Builder employee
- Corporate transfer
- Tenant purchase
Since you found this article, it’s likely that there is an issue with your FHA purchase, and you are seeking solutions. Once there is a possible identity of interest FHA situation, it is important to discuss the situation with an experienced lender. Fortunately, there are exceptions to the identity of interest rules. In this article, we explain FHA non-arm’s length transactions which trigger identity of interest. More importantly, we discuss the exceptions to the FHA policy as well as share details within the FHA certification form.
4 FHA Identity of Interest Exceptions
Sometimes lenders jump the gun and lower the LTV to 85%. There are several exceptions to the identity of interest rules. In these cases, it allows buyers to use the low 3.5% down payent rather than 15% down. Hopefully, we find solutions and remember to reach out to an FHA experienced loan officers.
Identity of Interest Family Member Exceptions
Family member transactions are pretty common. FHA identity of interest rules require a down payment increase to 15% in these cases. Although, two family member exceptions exist. If the home being sold is currently the principal residence of the family member (seller), then the family member buyer is only required to put down 3.5% of the sales price.
What if the buyer currently lives in the house? That is another identity of interest problem, but here’s where the second exception comes into play. If another family member owns the property and the buyer has been a tenant for at least six months prior to the purchase contract, an exception is allowed for 3.5% down payment. There must be written proof of buyer occupancy to prove the six months of tenancy. Examples include a signed lease or utility bill showing six months residency.
FHA Gift of Equity
Do not forget, if there is sufficient equity in the home, the sellers may gift the home’s equity as the down payment to the family member buyer. The FHA gift of equity rules allow the buyer’s down payment to be on paper only. Meaning, potentially no actual down payment funds are brought to closing! Also, another family member may provide gift funds for down payment or closing costs.
Identity of Interest: Builder Employee Purchase
FHA considers an employee of a builder who is also a family member of the builder an identity of interest. Therefore, the 15% down payment is required, but an employee of a builder who is NOT a family member may purchase a brand new or model home from the builder employer at full LTV. Which means only 3.5% down payment. As an added incentive, the builder could also pay the employee/buyer’s closing costs!
FHA Identity of Interest Exception for Corporate Transfers
In the case of employee relocation, corporations may buy the employee’s current home and sell it. Occasionally, the corporation may sell the employee’s home to another employee. This is allowed at the minimum down payment because it meets the identity of interest exception. Also, in the case of relocation over 100 miles, it is possible to have two FHA loans at once.
FHA Identity of Interest for Tenant Purchase
A common occurrence includes a landlord choosing to sell an investment property to the current tenant. FHA strictly enforces the 6-month occupancy rule. Therefore, a tenant or other occupant who has lived in a home for less than six months must put down 15% of the sales price. Whether renting for 1 – 5 months, the buyer must wait a full six months before executing a purchase contract. So, the identity of interest exception comes into play once the buyer has occupied the subject home for greater than six months.
Just like the family member example, proof of occupancy may include a signed lease, utility bill, or similar which proves greater than six months of buyer occupancy. The same rules apply to a lease with option to purchase contract. Anyone selling a rental property that has recently been a primary residence should read the Capital Gains Home Exclusion Rules. It can make a big difference in paying the IRS!
When Using an FHA Loan, Watch Out For Letting a Buyer Occupy Before Closing
For one reason or another, occasionally a closing is delayed. Maybe it is from waiting on a buyer’s credit update, receipt of down payment funds, or an employment situation. Conversely, a seller may have a situation that allows a buyer to move in early. Now, think about the 6-month occupancy rule we have discussed. At a certain point, a buyer who moves into the home becomes ineligible for the FHA minimum down payment.
Several times the writer has received questions from lenders looking for a way around this. Regretfully, the options are: The six months must be met, put down 15%, or buy another home. A fourth option is using another program type. None of the other major agency programs have this guideline. For example, a buyer who qualifies for a no money down USDA loan could move in early and then close.
FHA Identity of Interest Certification Form
Once an FHA buyer makes it to closing, every lender will include the “FHA Identity of Interest Certification” form, and The borrowers will certify if there is a relationship with the seller of the home. Hopefully, the closing is not the first time the topic is discussed between the buyer and seller. Imagine coming to this page of the closing package and learning one of the relationships above causes a higher down payment! Learning about the relationship at closing could cause a delay or even denial of the loan at the last moment.
While reviewing and signing this form, it is highly advised not to ignore the significance of this certification. Lying on the form would be mortgage fraud, which carries significant fines and penalties up to prison.
What is on the Identity of Interest Certification Form?
Although there may be slight variations for this form among lenders, each will have the basic required information. Each form will include applicant name(s), property address, identity of interest definition, relationship categories to choose, federal false claims warning, and a signature line. Below are the borrower choices on the form.
_____ I do not have an “identity of interest” with the seller of the property. We/I plan to purchase with the FHA financing I have applied for.
_____ I do have an “Identity of interest” with the seller of the property. We/I plan to purchase with the FHA financing I have applied for. Further, I understand my loan to value is restricted as follows:
_____ to 85% of the lesser of the property value plus closing costs or acquisition cost since I will occupy.
_____ to 75% of the lesser of the property value plus closing costs or acquisition cost since I am purchasing the property for use as a rental unit.
My relationship with the seller is __________________________________.
Best Tips for Buying a Home with an FHA Loan
- Contact an OVM Financial FHA experienced Loan Officer
- Discuss your scenario and goals
- Apply & provide documentation early
- If related to the seller, explain it
- Be open with your loan officer
- Communicate often
- Educate yourself by reading other OVM articles
Hopefully, this article provided much-needed knowledge and assistance.