August 25, 2016
A reader asks, “I have a client that inherited property along with 2 siblings from the Mothers estate. The client has resided in the subject property for 1 year and now wants to buy the other siblings out. Is it correct, that this scenario would meet the exempt status of identity of interest guidelines?”
The reader is asking this question in reference to an earlier post we wrote about FHA loans and identity of interest transactions. An FHA mortgage typically requires a minimum 3.5% down payment for new purchase loans. But the required down payment can be higher if there is an “identity of interest” as described in HUD 4000.1:
“An Identity-of-Interest Transaction is a sale between parties with an existing Business Relationship or between Family Members. Business Relationship refers to an association between individuals or companies entered into for commercial purposes.” An identity of interest transaction requires a 15% down payment unless the borrower meets certain exemption guidelines.
In the situation described by the reader, is an exemption possible? The short answer to the reader’s question is, “It depends”. Why? HUD 4000.1 states in part:
“The 85 percent LTV restriction may be exceeded if a Borrower purchases as their Principal Residence:
-the Principal Residence of another Family Member; or
-a Property owned by another Family Member in which the Borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
If the borrower meets one or both requirements above an exemption may be possible. It’s important to note that in the situation where the borrower is a tenant of the property, a written lease or alternative documentation as required/permitted by the lender will be a condition of the exception.
Also, lender standards, probate law, and/or state law may also have a say in how such a transaction may be carried out, so FHA loan rules are not the only ones at work in cases like these. A borrower may find that while he or she technically qualifies for the exemption, other factors may affect the transaction in general.
It’s important to seek advice on issues like these to see what other issues might play a role in the transaction. Discussing the situation with a loan officer may be the best place to begin.
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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