Buying a Home From a Family Member With an FHA Loan

November 5, 2013

While it is true that FHA loans rules are designed to protect the integrity of the lending process, there are some exceptions to the regulations known as “identity of interest” rules that reduce the amount of the FHA loan if certain conditions apply.

According to the FHA official site, “Certain types of loan transactions affect the amount of financing available to a borrower and how the maximum mortgage amount is calculated. These transactions include

• identity-of-interest
• properties with non-occupying co-borrowers
• three- and four-unit properties
• properties where a house will be constructed by a borrower on his/her land,
• and/or as a licensed general contractor
• payoffs of land contracts, and
• transactions involving properties under construction, or less than a year old.”

One of those “identity of interest” transactions affecting the FHA loan amount involves situations where family members want to sell homes to other family members.Here’s a quote from Chapter Two, Section B of HUD 4155.1: “A family member purchases another family member’s home as a principal residence. If the property is sold from one family member to another and is the seller’s investment property, the maximum mortgage is the lesser of

• 85% of the appraised value, or
• the appropriate LTV factor applied to the sales price, plus or minus required adjustments.”

There’s an addendum to this rule in Chapter Two, which says, “The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.”

FHA loan rules DO permit one family member to sell a home to another relative using an FHA insured mortgage loan–and if the borrower meets the criteria above, the 85% limit can be waived. Talk to your loan officer for more information on your specific needs to see which part of these rules may or may not apply in your situation.