FHA Identity of Interest
Quick insights
- An FHA identity of interest refers to a transaction between family members, business partners or other business affiliates—a home sale where the homebuyer and seller have a personal or professional relationship, for instance.
- The FHA classifies these transactions in a specific way that can affect down payment and other loan qualification requirements.
- Understanding the FHA identity-of-interest rules before making an offer on a home can help you avoid surprises and keep your mortgage application on track.
Purchasing a home from someone you know may seem like it’s more straightforward than purchasing one on the open market. However, if you’re using an FHA loan, these situations may be considered an identity-of-interest transactions, which are subject to special rules. Learning what qualifies as an identity of interest and how it affects your homebuying process can help you avoid unexpected delays.
What is an FHA identity of interest?
An FHA identity of interest refers to a home purchase where the homebuyer and seller have a business relationship or are family members. This can mean that the two parties may influence the terms of the sale, such as the purchase price. As a result, the FHA requires mortgage lenders to take a closer look at the transaction to help ensure it reflects the fair market value of the home and follows FHA lending requirements.
Relationships that usually prompt identity-of-interest rules
Anyone with a shared financial interest in the deal beyond the sale itself. This includes any pre-existing relationship between buyer and seller qualifies, such as:
- Family members (parents, children, siblings, spouses, in-laws, etc.)
- Employers and employees
- Landlords and tenants (such as purchasing a home you’ve been renting)
- Business partners
What are the FHA identity-of-interest guidelines?
Whether an identity of interest applies depends on the buyer-seller relationship and the details of the transaction. The process can also vary by lender, and there may be exceptions to certain rules. In general, FHA guidelines include the following:
- Additional lender review: Your mortgage lender may request additional documentation to verify the relationship, confirm the value of the home and ensure the sale meets FHA requirements.
- Higher down payment requirement: Many identity-of-interest transactions require a minimum 15% down payment instead of the standard FHA minimum of 3.5%.
- Exceptions may apply: Certain transactions, such as eligible family member purchases, builder’s employee purchases, owner-to-tenant sales, and qualifying corporate transfer purchases, may be eligible for the standard FHA minimum down payment (3.5%) if they meet FHA requirements.
Does an FHA identity of interest impact the homebuying process?
While additional documentation may be needed in certain situations, an identity-of-interest transaction does not inherently result in a longer approval or underwriting process. Identity-of-interest transactions are generally identified early in the application process. Any required documentation or mortgage underwriting conditions are addressed as part of normal loan review.
Preparing your paperwork early and responding quickly to lender requests can help keep the process moving.
How does FHA identity of interest affect your down payment?
The biggest impact of an FHA identity-of-interest transaction may be the potential 15% down payment requirement. A key draw of FHA loans for homebuyers can be the 3.5% minimum down payment requirement. Instead of qualifying for that standard minimum, eligible borrowers may need to contribute significantly more upfront in an identity-of-interest transaction. Exceptions may apply, but this can directly affect how much cash you’ll need at closing and change your homebuying budget.
What are common FHA identity-of-interest exceptions?
There are four exceptions that would allow eligible borrowers to qualify for the standard 3.5% FHA minimum down payment:
- Buying a family member’s primary residence: You may qualify for the standard 3.5% FHA down payment if you’re purchasing a home that your family member currently uses as their primary residence, and you also plan to make it your primary residence. If a family member is selling you a rental property or vacation home, the exception doesn’t apply unless you’ve been a tenant there for at least six months immediately predating the purchase contract.
- Buying the home you’ve been renting: If you’ve rented the property for at least 6 months immediately before signing the purchase contract, you may qualify for the standard 3.5% down payment instead of 15%. You will need a lease or other written proof of occupancy.
- Builder’s employee: The FHA provides an exception to the identity-of-interest maximum LTV restriction when an employee of a builder, who is not a family member of the builder, purchases one of the builder's new homes or model homes as their principal residence. This may allow eligible borrowers to purchase the home with as little as 3.5% down provided all applicable FHA requirements are met.
- Corporate transfer: The FHA provides an exception to its identity-of-interest financing restrictions for certain corporate transfer transactions. This exception applies when a company relocates an employee, purchases the employee’s home, and later sells that home to another employee. When the transaction meets FHA requirements, financing above the standard 85% identity-of-interest LTV limit may be permitted.
In summary
When a homebuyer and seller have a family or business relationship, the home sale is often considered an FHA identity-of-interest transaction. This may require additional lender review and, in many cases, a 15% down payment. However, certain exceptions can allow qualified borrowers to make the standard 3.5% FHA minimum down payment.
It’s helpful to learn FHA identity-of-interest rules early when you’re planning to buy a home from someone you know. In addition, working closely with a Home Lending Advisor can help you determine which requirements apply to your purchase and prepare for a smoother homebuying experience.
