March 26, 2013
Sometimes an FHA loan transaction involves the sale of a home between family members. In such cases there are FHA loan rules that may apply depending on the circumstances. A reader asks, “If I buy a house from a relative is it true that I have to have 15% down payment for FHA loan?”
A quick read of HUD 4155.1 Chapter 2 Section B reveals some special rules that apply in circumstances like these. This situation is known as an “identity of interest” transaction. The FHA defines “identity of interest” as, “a sale between parties with family or business relationships”.
What do FHA loan rules say about such sales? “The maximum loan-to-value (LTV) factor for identity-of-interest transactions on principal residences is restricted to 85%.” That means that yes, the borrower is required to make a 15% down payment in such cases. But the FHA also permits exceptions to this rule, including a situation where the FHA loan applicant has been living on the property as a tenant prior to the sale.
The specific language of the FHA loan rule and the exception to that rule is as follows:
“A family member purchases another family member’s home as a principal residence. If the property is sold from one family member to another and is the seller’s investment property, the maximum mortgage is the lesser of
–85% of the appraised value, or
–the appropriate LTV factor applied to the sales price, plus or minus required adjustments.
Note: The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.”
If the reader has such evidence available, it may be submitted to the lender as proof that the 15% down payment rule may be waived. However, the borrower is still responsible for making a down payment according to FHA loan rules–it’s just lower than 15%. The minimum required investment for most FHA loans is 3.5%.
If you have questions about FHA loans or FHA refinance loans, ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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