May 8, 2014
A reader asks, “What is defined as a family member? My partner and I were told by our underwriter that we can only get a loan for 85% of the house’s value. The person we are purchasing from is a fourth cousin of my partner who wouldn’t be on the mortgage.”
“The house’s appraisal value is significantly lower than expected. It’s replacement value is over 250k, but due to a glut of houses on the market and a lack of comparable in the area it was appraised at under 75k. It was appraised just higher than what the purchase price would be. Our loan officer has questioned the underwriter about this and they said family is family. Is there a definition of family put out by the FHA?”
The sale of a home from one family member related by blood, marriage, or the law to another family member could be defined as an Identity of Interest transaction and there are strict rules governing them.
The reader question referrs to a rule found in the FHA loan rulebook, HUD 4155.1, Chapter 2 Section B, which limits the loan-to-value ratio of Identity of Interest transactions. Chapter Two says:
“An identity of interest transaction is a sale between parties with family or business relationships. The maximum loan-to-value (LTV) factor for identity-of-interest transactions on principal residences is restricted to 85%.”
However, there ARE exceptions to this rule. According to Chapter Two one of those exceptions 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.”
Borrowers may find lender standards may or may not permit this–if the lender chooses to require the 85% LTV limit, the borrower may have no recourse except to look for another lender or accept the terms of the loan.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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