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.
