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, you may 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 a Federal Housing Administration (FHA) identity of interest. This preexisting connection may make it harder to get approved for a mortgage.

It’s important to understand what an identity of interest is and know where 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?

An FHA identity of interest refers to an existing relationship between a property buyer and seller when applying for an FHA loan. This preexisting connection can be either personal or professional in nature.

An FHA identity of interest will only come up when applying for an FHA loan. For other types of loans, these types of transactions may be known as non-arm’s length transactions.

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?

The biggest difference between a regular FHA loan and an FHA identity of interest loan will be the size of your down payment.

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.

FHA Identity Of Interest Exceptions

On the bright side, several FHA identity of interest exceptions are available that may help you keep your down payment to 3.5% as a home loan borrower.

The FHA identity of interest exceptions include:

• Primary residence exception: When you’re purchasing a primary residence from the seller (who may be a family member, friend, loved one, etc.).
• Previous resident exception: When you’re a home buyer who has lived in the residence for 6 months before purchase.
• Employer relocation exception: When you’re buying a house owned by your employer through a relocation agreement 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. These methods are usually better suited for when buying a home from a family member.

• Home equity gift: If family members gift home equity to a borrower, then the seller enjoys the option to waive the down payment amount.
• Tax-free gift from family: Buyers can ask family members to gift them the funds necessary to meet the down payment as well. To do this, they’ll need to provide a gift letter.
• Move in before buying: As previously renters who are already living in the property they're seeking to purchase, they can pay the low 3.5% down payment amount – if they wait 6 months.

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 if you’re buying a property from someone 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. Start the mortgage approval process today to determine which type of home loan best fits your needs.