September 13, 2016
A reader asks, “My wife and I have resided in a three family home for 29 years. We have paid significantly below market rate rent for all these years because 1) initial elderly landlords just wanted good tenants and they liked us, 2) we looked after the elderly landlord after her husband died for many years and 3) the current owner was always appreciative for what we did for her mother (landlord has since passed and property is in Family Trust, their daughter is the trustee).”
“She put the property up for sale and we submitted the winning bid. Now, two weeks before closing, the underwriter has said that because we paid less than market value for all those years that now we have an Identity of Interest and required to up our down payment from 3.5% to 15%.”
“I do not understand why we are considered an Identity of Interest. There is no business relationship, we are not colluding on the price of the property (the appraisal has set that price), and we are not related at all.”
FHA loan rules in HUD 4000.1 state: “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, FHA loan rules add, “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.”
And also, “The 85 percent LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
As you can see this is a bit of a tricky issue. A call to the FHA directly may be needed for additional guidance depending on circumstances. And in the case of this particular reader question, there is the added complication of below-market rent. HUD 4000.1 has the following to say on that subject:
“Rent may be an inducement to purchase when the sales agreement reveals that the Borrower has been living in the Property rent-free or has an agreement to occupy the Property at a rental amount considerably below fair market rent.”
In cases where the lender has determined there may be an inducement to purchase, the following definition and standards apply from HUD 4000.1:
“Inducements to Purchase refer to certain expenses paid by the seller and/or another Interested Party on behalf of the Borrower and result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate Loan-to-Value (LTV) percentage.”
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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