FHA Identity of Interest: How It Impacts Your Down Payment

Buying a home has become all the more expensive in today’s times. But if someone you know is planning to sell a property for a good price, it can be a good deal for you.

However, your lender must be aware of your relationship with the seller if you opt for an FHA loan.

What Is the Identity of Interest in Terms of an FHA Loan?

The concept of identity of interest implies a relationship that exists between the buyer and the seller. This relationship can be either personal or professional. It only applies when the buyer opts for an FHA loan.

Other similar real-estate transactions are termed non-arm’s length transactions. However, in the case of an FHA loan, it is called identity of interest.

Even though you’re buying a home from someone you know, it’s advisable to ensure that the seller is following all the FHA flipping guidelines if they’re selling it within 90 days of their purchase.

For example, FHA identity of interest guidelines describe a transaction between you and your parents or a landlord and their tenant. This relationship between the buyer and the seller gives rise to the assumption that the buyer may not pay a fair value for the house.

How Does the FHA Identity of Interest Affect Borrowers?

The impact of the identity of interest on borrowers is in the form of a down payment. Ideally, FHA loans require a down payment of 3.5% of the home’s price. However, the down payment requirement rises to 15% for the identity of interest.

Usually, government loans, such as FHA loans, have lower down payment requirements. This is because these loans have the backing of the federal government, which reduces the borrower’s default risk.

FHA Identity of Interest Exceptions

There are a few exceptions to FHA identity of interest that can keep your down payment requirements at 3.5%.

• Primary Residence: You can qualify for a 3.5% down payment if you plan to purchase the primary residence of your family member, fiancee, etc.
• Previous Resident: This refers to buying a house from your landlord in which you’ve lived for more than six months.
• Employer Relocation: This is when you buy a house from your employer as a part of a job relocation agreement.

Bottom Line

Borrowers can obtain a home loan through an FHA program with a minimum down payment of 3.5%. However, these requirements may increase to 15% if you buy a property from someone you know personally or professionally.

In cases like this, the transaction is termed the FHA identity of interest. So, it’s advisable to opt for other types of loans if you’re buying a home from a family member, employer, or landlord.

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