When someone you know is selling a property you are considering purchasing, such as a close relative or your renter, you might believe you have hit the jackpot, especially given the current state of the real estate market.
You must give a second thought to your decision because if you intend to request an FHA loan, this relationship is known as an FHA identity of interest, and it could jeopardize your likelihood of obtaining a loan.
From the viewpoint of an FHA loan office, a house transaction that involves a buyer and seller who have known one another prior to the sale of a property is usually not positive. So, before you proceed with the purchase, you will want to understand how an FHA identification of interest can affect your house purchase and what you can do about it.
What Identity of Interest Stands for In Terms of FHA Loans?
When filing for an FHA loan, the identification of interest indicates that the buyer and seller have a prior link, such as a familial or business tie. This could be a deal between a father and a kid, an organization and a worker, or people who are linked by other means.
The buyer is deemed to not be paying a reasonable market price for the property in this type of sale. Because the property is unlikely to touch the open market, it appears like you are receiving a wonderful deal and as a result, other prospective buyers will be unable to bid for it. While this may appear to be in your favor, the US government frowns at it.
How Borrowers Are Affected by The FHA’s Identity of Interest Policy
The identification of the party with a vested interest can influence the initial payment criteria of an FHA lender. A down payment of 3.5 percent of the home’s purchase price is often required by FHA lenders, but if the transaction involves identity of interest, the minimum will likely be increased to 15% of the appraised value. As a result, if you want an FHA loan, you will need to come up with a larger sum of money.
FHA loans, for instance, typically need a lesser down payment and because the federal government guarantees government loans, the lender’s risk of default is reduced.
Exceptions to the FHA’s Identity of Interest Prerequisites
Thankfully, the identity of interest down payment laws has a few exemptions. To keep the down payment at 3.5 percent, a borrower must fulfill the minimum FHA identity of interest criteria.
You are purchasing a family member’s, domestic partner, or fiancé’s principal residence.
You are acquiring a home from a landlord or a close relative that you have lived in for at least 6 months.
As part of a work relocation deal, you are purchasing a home owned by your business.
FHA loans involve having minimal down payment, making them enticing if you have the money saved. However, if you are buying a home from a friend, the transaction is now considered an identity of interest, which means the FHA loan down payment demand might be increased.
As a result, looking into other funding options, such as a traditional loan, maybe a better fit for your needs.