What Does FHA Identity Of Interest Mean?

If someone that you’re related to or know is selling a piece of property at a good price, odds are that you’ll want to buy it. But if you’re thinking about applying for an FHA loan as a means to finance the purchase, your financial lender will want to know about this relationship – commonly known as an FHA identity of interest. This preexisting connection may negatively impact your odds of mortgage approval.

It’s important to understand what an identity of interest is, be aware of the particulars of identity of interest transactions and know where FHA identity of interest exceptions may exist. Let’s take a closer look at what you need to know as a borrower seeking a home loan when these circumstances apply.

What Is Identity Of Interest With An FHA Loan?

A Federal Housing Administration (FHA) identity of interest refers to an existing relationship between a property buyer and seller when applying for an FHA loan. This preexisting relationship can be either personal or business-related.

This preexisting connection can be either personal or professional in nature. FHA identity of interest may sometimes also be known as a non-arm’s length transaction when other types of mortgages are involved.

An FHA identity of interest will only come up when applying for an FHA loan. In any event, if you’re a borrower on the hunt for a home loan, it’s important to know what an FHA identity of interest is, as well as potential impacts on your real estate purchase transaction.

For example, an FHA identity of interest might describe a transaction between a parent and their adult child, an organization and one of its workers, or a property owner and tenant. If you have a relationship with a property’s seller, the assumption because of this relationship is that you won’t be paying fair market value for the real estate holding.

How Does FHA Identity Of Interest Impact Borrowers?

An FHA identity of interest increases the down payment requirement that borrowers will need to pay on their FHA loan. As a rule, FHA home loans tend to require a minimum down payment of around 3.5% of the home’s purchase price. However, in the case of an FHA identity of interest transaction, your mortgage lender’s down payment requirement could be up to 15% of the home purchase price.

Buyers who are part of these types of transactions should prepare to face a higher down payment requirement. That means having to bring more money to the table if you wish to receive an FHA loan.

This can prove problematic in two ways. One: It will require you amass more savings before securing FHA loan approval. Two: Government-backed loans such as FHA loans typically offer lower down payment demands, and any such raises in down payment requirements may make an FHA loan less appealing.

FHA Identity Of Interest Exceptions 

On the bright side, there are several FHA identity of interest exceptions that may help you continue to only wind up having to make a 3.5% down payment as a home loan borrower.

FHA identity of interest exceptions available include:

• If you’re purchasing a primary residence from the seller (who may be a family member, friend, loved one, etc.) you can continue to pay 3.5% down.
• If you’re a home buyer who has lived in the residence for 6 months prior to purchase, you can also pay just 3.5% down as well.
• If you’re buying a house that is owned by your employer through a relocation agreement, then you will be able to just pay 3.5% down too.

How To Avoid An FHA Identity Of Interest High Down Payment Requirement 

Of course, there are other ways for borrowers to avoid paying a higher down payment during their real estate purchase. For instance, if family members gift home equity to a borrower, then the seller enjoys the option to waive the down payment amount.

Buyers can also ask family members to gift them the funds necessary to meet the down payment as well. In addition, for renters who are already living in the property that they’re seeking to purchasing, if they wait 6 months, they can also just pay the low 3.5% down payment amount.

The Bottom Line: FHA Identity Of Interest Transactions May Be Enticing But Do Have a Downside

FHA loans generally offer home loans to borrowers with low down payment requirements. But these down payment requirements can increase considerably (from 3.5% – 15%) if you’re buying a property from someone whom you know and have a preexisting personal or business relationship with. If you’re looking to buy a real estate holding from a family member, friend or loved one, you may wish to see what other types of home loans that you qualify for.