If someone you know, like a family member or your landlord, is selling a property you’re interested in, you may think you struck gold – especially with the current housing market conditions.
But hold on just a second. Because if you’re planning on applying for a Federal Housing Administration (FHA) loan, this relationship is known as an FHA identity of interest, which could harm your chances of mortgage approval.
A home transaction between a buyer and seller who know each other before the sale of a property may be viewed as a red flag by the FHA loan office in certain situations. So, before you move forward with the transaction, you’ll want to know how an FHA identity of interest can impact your home purchase and what you can do about it.
When applying for an FHA loan, the identity of interest means there’s a preexisting connection between the property’s buyer and seller(s), such as a family or a business relationship. This can refer to a transaction between a parent and child or a corporation and employee, along with other combinations of people related through other affiliations.
For example, let’s say you want to buy your childhood home from your parents, or you’re interested in purchasing your condo from your landlord. Both buyers in these examples have a relationship with the seller.
In this type of transaction, it’s assumed that the buyer isn’t paying fair market value for the property. In other words, it looks like you’re getting a great deal on the property since it won’t likely hit the open market. Because of this, other potential buyers won’t have the opportunity to compete for it. While this might be favorable to you, the U.S. government begs to differ.
It’s important to point out that an FHA identity of interest is also known as an FHA non-arm’s length transaction. Regarding FHA loan terminology, you’ll hear this transaction referred to as identity of interest.