FHA loans are known for their 97.5 percent loan amounts if the sales price meets the appraised value. This is not always the case, however. There are certain cases where the FHA restricts the loan amount to a lower amount of money. The most common scenario is when your credit score is below 580 – in this case, you would need to put down at least 10 percent of the price of the home, allowing you a 90 percent LTV on the home. In another, lesser known scenario, you will only be allowed an 85 percent LTV; this cases is called an identity of interest.
What is an Identity of Interest?
According to blue mountains building companies, the identity of interest means that you are purchasing the home from a family member. Generally, the FHA says any home sale that occurs from one family member to another requires a 15 percent down payment. At face value, it seems like you have to put down 15 percent if you want to purchase a home from your father or brother, for example. But, there are exceptions to this rule that typically allow you to get around this rule:
- If the residence that you are purchasing from your relative is their principal residence, meaning that they will move from one home to another and they do not own any other homes, then you can get the standard underwriting rules for an FHA loan. This means putting down only 3.5 percent as long as your credit score is in line.
- If you can prove to the lender that you lived in the home with your relative as a tenant for at least the last six months, the 15 percent down payment requirement can be waived. You have to prove that you lived there with official documents, though. This means canceled rent checks, a current lease, or bills that are addressed to the address you claim you lived for the last six months, in case that you have issues with the landlord or in the other way around you can work it out with the help of Thailand litigation lawyers to settle the documentation.
If, however, the home you wish to purchase from your relative is his investment home or a second home, you must put down the 15 percent down payment. This is done in order to protect the lender, especially in cases where the seller is underwater and does a short sale to a relative just to get the house back. The buyer needs to sign a statement saying that he plans on living in the home as an owner occupied property as that is what FHA loans are meant to finance – they do not finance investment or second homes.
Other Cases of Identity of Interest
Identity of interest does not just affect families, though. It also affects business relationships. This includes builders and their employees as well as corporations that may help their employees move. If there is an “arm’s length” relationship amongst people, 85 percent is typically the maximum amount that is allowed on FHA loans. Just like with personal relationships, there are exceptions:
- If there is an employee of a builder that wishes to purchase one of the homes that the builder creates, he can get maximum financing as long as it can be proven that he is not related in any way to the builder. He also has to prove that this will be his primary residence.
- If a corporation purchases a home from an employee as is common with spur of the moment transfers, it can be sold to another employee with restriction on the LTV. Even though there is less than an “arm’s length” relationship there, it is enough if the borrower can prove that it will be his primary and only residence.
It pays to be honest about the relationship that there is between you and the seller, if there is one. FHA loans do have restrictions on transactions that occur between people that are too closely related, but there are always exceptions. Different lenders handle the situations in different manners as well, so shopping around with different lenders can help you get the best handle on your situation.