FHA Identity Of Interest: When Does The 15% Down Payment Is Applicable?
In this article, I explain thoroughly the new and updated FHA identity of interest guidelines, that enforce borrowers to declare this identity of interest (Source) and provide a downpayment of fifteen percent (15%) of the value of the object acquired with an FHA mortgage loan (Source). The reason for this high downpayment (Source) is the special relationship between the participants of the transaction (Source). The formal declaration of the identity of interest avoids mortgage fraud (Source). We will go through this topic in detail below.
Furthermore, I offer you the possibility to download the FHA identity of interest form easily.
As our readers know well, the FHA loans allow borrowers the possibility to finance their FHA mortgage loan transaction with down payments typically low as three and a half percent (3,5%).
Furthermore, there is even a special FHA program where the borrower can enter with only one hundred dollars of downpayment. Nevertheless, there are cases, encompassed under the FHA identity of interest guidelines denomination, where borrowers require to execute a down payment of fifteen percent. These operations are also called as non-arm´s length transactions.
HUD 4001, which is the FHA Single Family Home Loan regulation, explains the concept of identity of interest regarding FHA mortgage loans. I explain to you here with practical situations which are the FHA identity of interest guidelines.
To start with, this is a special situation that may affect buyers and lenders where the borrower and prospective buyer is required to perform a down payment of 15 % of the value of the home.
It is referred to the specific interest that the seller of a real estate object may have to offer this object for sale to the interested party, the buyer, where these parties: prospective buyer and seller, are bound by an existing relationship that can be contractual or familiar as we explain below.
- Parties have a family relationship
- Involved participants are employees and their employers
- Parties have a business partnership
- One party is the tenant and the other is his landlord.
The business transactions where an FHA identity of interest is verified, are not prohibited or discouraged at all by FHA lending regulations. However that FHA identity of interest requires that the FHA lender solicits the buyer higher down payment.
Thus, HUD 4000.1 has clear instructions in this matter:
The maximum Loan To Value percentage for FHA identity of interest operations on principal residences is restricted to eighty-five percent (85%) Likewise, the maximum loan-to-value percentage for a business transaction wherein a valid rental contractual relationship between the tenant and his landlord is still existing at the moment when the contract is executed is restricted to this aforementioned eighty-five percent (85% percent).
The loan-to-value, that we have mentioned above, is a ratio representing the quantity of the loan as a percentage of the valuation of the real estate object, what is the “property”.
We mention this FHA identity of interest guidelines frequently to our readers. It is important to discover it and declare it to the seller as soon as you enter in negotiations. It would be a problem if, at the moment of closing, the borrowers discover that the down payment should be 15 % instead of a 3,5 % that they were initially expecting to pay.
Exceptions To The FHA Identity Of Interest Guidelines
Of course, to those “FHA identity of interest” guidelines explained above, there are some exceptions where the borrower and prospective buyer is waived from executing that down payment of 15% and he will be paying the standard 3.5% of downpayment.
Therefore, there are cases where the eighty-five percent loan to value formulation is waived, that we describe below in the following non-exhaustive list:
Principal Residence And Family Members
The eighty-five percent (85%) Loan To Value will be waived for business operations where the borrower is acquiring “…..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…..”
The borrower is here obliged to accomplish the indications of the FHA rules of occupancy: Therefore he has to perform the physical occupation of the home (the real estate object of the FHA mortgage loan) as the primary residence. In that case, he will execute a downpayment of 3,5 %
Employee Of The Builder
Case of the employee of the builder. There is another exception for the eighty-five percent loan-to-value ratio restriction, that may be exceeded “…..if an employee of a builder, who is not a family member, purchases one of the builder’s new houses or models as a principal residence…..”
Relocation Of An Employee
In the case of corporate transfer of employees, the loan-to-value (or simply LTV) restrictions may be exceeded, when a corporation, as a registered legal entity, “…..transfers an employee to another location, purchases the employees house, and sells the house to another employee.”
This is a typical case in corporations, seen very often in the market. An employee is relocated. To facilitate his relocation process, the company purchases him his house in the former location. That home is resold by the corporation to another employee: there is an identity of interest identified. However, here we have an exception to the general principle. The employee buying the home is allowed to perform the minimum down payment.
Tenant Purchases The Property He Is Renting
A typical situation in the market also is when the tenant wants to buy a property he occupies through a contractual relationship that can be either a rental contract, a VA lease, a lease contract, or a lease with an option to purchase.
The FHA strict rules enforce a mandatory occupancy of the home for more than six months in order to be eligible for the standard down payment (3.5%). If the tenant (here also the borrower and prospective buyer of the real estate object) has lived in the home for less than six months, he is subject to the FHA identity of interest guidelines that as we know, enforce him to perform a downpayment of 15 %. Obviously, to trigger the exception and be eligible for the standard down payment, I will recommend the tenant to stay for more than six months physically living in the home.
So this eighty-five percent of loan-to-value restriction may be exceeded also in the relationship between tenant and landlord when the tenant acquires the real estate object “…..if the current tenant purchases the Property where the tenant has rented the property for at least six months immediately predating the sales contract…..”. Here it is advisable for the prospective borrowers to consider how the six months rule may affect them and make some planning in advance, before applying to the loan. When this exception applies, the borrower will be subject to the standard down payment of 3.5 % only as we thoroughly described above.
In all these cases, I can recommend by experience, that the relationship between the landlord and the tenant has to be documented through a rental or lease contract, or any written evidence that also includes a mention of the starting date (dies a quo) of the relationship. Also, I will recommend the tenant to collect the utility bills that can serve as evidence, along with the lease or rental contract.
If the tenant has a lease contract with an option to purchase and is forced to exercise that contractual option without having time for the six months occupancy required by the FHA identity of interest guidelines, he can simply perform the higher down payment. Another possibility is to move into a different non-FHA mortgage loan.
Additional Exceptions At State Level
Additional exceptions to the FHA identity of interest guidelines may be existing at the state level may apply. In several articles, we are covering regulation from each of the states that may influence the FHA identity of interest conception.
FHA Identity Of Interest Form
There is available a model of an FHA identity of interest certification form that you can directly download for free here and read a short explanation about how to use it.
This form has to be signed by the borrowers who incur one of the causes of the identity of interest and explain, if feasible, why they are eligible to an exception.
It is important that borrowers and FHA lenders align early in the discussion in regards to the content of this FHA identity of interest form. If they align later at the end of the closing stage, the borrower can even discover that he is unable to complete the 15% down payment required.
Download The FHA Identity Of Interest Certification
Below the article, you will easily find a link to download the FHA identity of interest certification form. However, please read the following indications as well.
In these cases there is an identity of interest identified between the parties, that is:
- Members of the same family who are borrowers (wife and husband) and the seller (stepfather).
- A working relationship between a borrower (employee) and the seller (his employer).
- The business relationship between two business partners who have a related partnership.
- Contractual relationship in a lease or rental contract between the seller (the landlord) and the prospective buyer and borrower of the FHA mortgage loan (his tenant)
In these cases, there has to be a disclosure of this relationship that imposes the subjects participants of the FHA mortgage loans the restriction to complete the 15% down payment.
You can download the form using the link below to complete the FHA identity of interest certification.
Each borrower that participates in the FHA loan mortgage has to complete it and sign it.
Well before the closing stage, the FHA lender should be including this FHA identity of interest certification form into the discussion and into the package of documents for the closing stages. Just think of the situation when at the closing phase, the participants discover that they have to pay a much higher down payment than what they expected. Probably they cannot complete the FHA mortgage loan in this case.
Download The FHA Identity Of Interest Form
Download here easily the FHA Identity Of Interest Form to declare the identity of interest between the borrower of an FHA mortgage loan and the seller of the real estate object.
- There is a family relationship between the participants of the mortgage loan.
- The employer is the seller and his employee is the borrower
- The participants of the FHA mortgage loan are business partners
- The parties are also involved in a lease or rental contract as tenant and landlord.
An example where you will require this form is when a couple, a wife and her husband, want to become involved as borrowers in an FHA mortgage loan and the seller is the brother of one of the participants. In this case, there is an exception that I explain here. However, the borrowers (for example, there can be more than one if there are a husband and his wife, both borrowers) should complete the form linked below anyway.
It is important that you fill this form and declare the identity of interest to the FHA lender as soon as possible. Just consider for a moment the situation where you reach the final stages of the arrangement of the FHA mortgage loan and the identification of the existence of an identity of interest would oblige you to a higher down payment. This higher down payment requirement could also have the consequence of the denial of the loan.
In the form, you will have to complete the names of the applicants, the address of the object of the FHA mortgage loan, so the address of the property, identification of the property, disclosure of the identity of interest situation, and the signature at the end. Write down always true statements as lying in the form could be regarded as mortgage fraud (Source).