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FHA Loans: What To Know About Identity of Interest

If you come across a property being sold by someone you’re familiar with, like a family member or your landlord, you might feel like you’ve hit the jackpot – especially in today’s housing market. 

But wait a minute. 

If you’re thinking of applying for an FHA loan, this scenario falls under an FHA identity of interest, which could jeopardize your mortgage approval. The FHA generally views home transactions between pre-existing acquaintances with skepticism. So, before proceeding with the deal, it’s crucial to understand how an FHA identity of interest could affect your home purchase and what steps you can take to address it.

What does “Identity of Interest” mean in relation to an FHA loan?

When seeking an FHA loan, an “identity of interest” arises when there is a preexisting connection between the property buyer and seller, like a family or business tie. This connection could involve a parent and child, a company and its employee, or individuals linked through other associations.

For instance, imagine wanting to purchase your childhood home from your parents or buying your condo from your landlord. In both scenarios, there exists a relationship between the buyer and the seller. In such transactions, it’s assumed that the buyer isn’t paying the property’s fair market value. This situation may seem like a great deal since the property likely won’t hit the open market, depriving other potential buyers of the chance to compete.

While this setup might seem advantageous to you, the U.S. government holds a different view. It’s noteworthy that an FHA identity of interest is also referred to as an FHA non-arm’s length transaction in real estate dealings involving other mortgage types. However, in the context of FHA loan terminology, this type of transaction is known as an “identity of interest.”

How does FHA Identity of Interest impact borrowers?

Understanding how an FHA identity of interest impacts you as a borrower is crucial. This type of scenario can influence the down payment requirements set by FHA lenders. Typically, FHA lenders ask for a minimum down payment of 3.5% of the home’s purchase price. However, in cases involving an identity of interest, this amount could surge to 15% of the purchase price. Consequently, as the buyer, you’ll need to come up with a larger sum of money to secure approval for an FHA loan.

Government loans, such as FHA loans, are known for their lower down payment prerequisites. This is due to the federal government’s guarantee on these loans, which mitigates the lender’s risk of default. Government loans are particularly attractive to households with modest incomes that haven’t saved up a substantial down payment. Hence, if you’re looking to buy a property from a familiar source, opting for an FHA loan might no longer be the most favorable choice.

FHA Identity of Interest Exceptions

Thankfully, there are some exemptions to the identity of interest regulations for down payments. Here are the FHA identity of interest criteria that borrowers need to satisfy to maintain a 3.5% down payment:

  • You are purchasing the primary home of a family member, domestic partner, or fiance.
  • You are purchasing a property from a landlord or family member after residing in it for a minimum of six months prior to the acquisition.
  • You are purchasing a home owned by your employer as part of a job relocation agreement.

Key Takeaway

FHA loans offer low down payment requirements, which are attractive if you have the funds. However, if you’re purchasing a property from a familiar party, the transaction is considered an identity of interest. This can escalate the FHA loan down payment to 15%. Therefore, it might be prudent to explore alternative financing avenues like a conventional loan that better suits your circumstances. 

Kick-start your journey today with Elevation Mortgage to determine your eligibility for a government home loan!

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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