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Home Purchase

Buying a Home from a Family Member | Non-arm’s Length Transaction

by Nicholas Auriemma, NMLS# 1455001
6 years ago
in Purchase
Buying a Home from a Family Member Non-arm's Length Transaction

Buying a Home from a Family Member | Non-arm’s Length Transaction

Are you looking into buying a home from a family member or do you have a relationship with the seller? This is considered a non-arm’s length transaction and depending on the loan program, there are additional guidelines. Some lenders have stricter guidelines when it comes to non-arm’s length transactions and a gift of equity.

What is a Non-arm’s Length Transaction

A purchase transaction where there is a relationship or business affiliation between the seller and buyer is considered a non-arm’s length transaction. FHA and conventional allow these purchase transactions, but there are specific restrictions. One scenario that does not allow non-arm’s length transactions would be delayed financing.

Guidelines When Buying a Home from a Family Member

Certain loan programs have minimum borrower contribution restrictions. FHA considers buying a home from a family member or having a business relationship as an identity of interest transaction, but there are exceptions.

FHA maximum loan-to-value for an identity of interest transaction is 85%. Conventional guidelines for these types of purchase transactions are different than FHA’s guidelines. Depending on the conventional loan program, there may be a minimum borrower contribution required.

A licensed Loan Originator can help you determine if your case scenario works.

FHA – Gift of Equity

An FHA loan allows family members to transfer equity that has been built up as a gift to another family member. There is no hard money in exchange when there is a FHA gift of equity. When buying a home from a family member or relative, the gift of equity always has to be verified as a family member.

Conventional – Gift of Equity

A gift of equity is a portion of the seller’s equity that is transferred as a credit in a purchase transaction. A seller credit is different than a gift of equity because the seller credit can only be applied to closing costs.

Gift of Equity Requires a Letter

The gift of equity letter will specifically include:

  • Name of donor and address.
  • Relationship of the donor.
  • Amount being given.
  • Recipient of gift.
  • Date of transfer.
  • Signatures of both the donor and recipient.

Lenders have acceptable letters that can be filled out.

Other Programs that Allow a Non-arm’s Length Transaction

  • Debt-service coverage ratio (DSCR) loans.
  • Non-qm programs.
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Nicholas Auriemma, NMLS# 1455001

Nicholas Auriemma, NMLS# 1455001

Nicholas Auriemma is a Loan Originator at Nationwide Mortgage & Realty, LLC, providing information on mortgages that can often be confusing even to real estate and mortgage professionals. Borrowers can be discouraged because mortgage professionals can be mistaken due to guidelines always changing, the extent of guidelines, their company having an overlay (stricter guideline), or other lenders not offering a loan program. Call or text Nick anytime at 630-779-8430 or email at nick@nationwidemtg.net.

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  • Home
  • Request Information
    • Apply Now
  • About Us
    • Career Opportunities
    • Contact Us
    • Meet the Team
  • Purchase
    • Conventional Loan
    • Condotel & Non-Warrantable
    • FHA Loan
    • FHA 203k
    • Fix & Flip
    • Investment
    • Jumbo & High Balance
    • New Construction
    • Non-QM Loans
    • USDA Loan
    • VA Purchase Loan
  • Refinance
    • Cash Out & Debt Consolidation
    • Conventional Refinance
    • Condotel & Non-Warrantable
    • FHA 203k
    • FHA Streamline Refinance
    • Investment
    • Non-QM Loans
    • Reverse Mortgage
    • VA IRRRL
  • Loan Process
    • Application Checklist
    • Credit Report
    • Home Buying Do’s and Don’ts
    • Interest Rates
    • Mortgage Calculator
    • Pull Credit
  • Mortgage Blogs
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