March 7, 2017
Is there a penalty of some kind for purchasing a home from a relative when using an FHA mortgage? A reader asked a question about that recently in our comments section. “I would like to purchase my father-in-laws home. He passed away 2 1/2 years ago. His estate was left to my brother-in-law and my two daughters since I was divorced from his son many years ago and he passed away 17 years ago.”
“We have been keeping up and the utilities have been in service since then and we have been keeping the house up cleaning and painting it. The house appraised $109K. My question is: for me to purchase the house through FHA do I have to have been living in the house for a year and the relationship with my daughters affect the purchase with FHA in any way?”
FHA loan rules in HUD 4000.1 point out that certain transactions known as “identity of interest transactions” require a much higher down payment (15%) depending on circumstances. FHA rules describe these transactions as follows:
“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.”
The FHA definition of “family members” is quite broad, and includes domestic partnerships, in-laws, and adopted children. According to HUD 4000.1, “The maximum LTV percentage for Identity-of-Interest transactions on Principal Residences is restricted to 85 percent. The maximum LTV percentage for a transaction where a tenant-landlord relationship exists at the time of contract execution is restricted to 85 percent.”
However, for the purpose of answering this reader question it is very important to point out the exceptions to this set of rules. According to page 153 of HUD 4000.1, the 85 percent maximum LTV restriction does not apply for Identity-of-Interest transactions for a specific set of circumstances which include tenant purchases, corporate transfers, and the following as descbribed on page 153:
“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.”
Lender standards, state law, and other factors may apply, but the above is the FHA minimum standard for purchasing from a family member. Speak to a loan officer if you are unsure how these rules may affect your mortgage loan or refinance loan.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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