Wisconsin and Illinois Identity of Interest Transaction (family member to family member purchase)

Posted by madisonmortgage on June 29th, 2009

Wisconsin and Illinois Identity of Interest Transaction (family member to family member purchase)

There’s not a lot of information on this topic, so today I thought I would discuss what it is and what it means to you.

Not too long ago, purchasing a home from a family member and having them gift you equity so that you could get a better interest rate or lower loan to value was an easy task but that is no longer the case. Since conventional loans require 740 or better credit scores to even have a shot at the best mortgage rates, FHA has been picking up the slack. But there is a little known guideline that FHA has that conventional loans don’t and that is the identity of interest rule.

Basically, if you are purchasing from a family member and the family member does not currently owner occupy that home, you as a purchaser, are limited to 85% loan to value. So, if you were planning on having ma or pa gift you 5 or even 10% equity but they don’t occupy the property, you will have to come up with the other 5 or 10% yourself or have that family member raise the price of the home to the appraised value and lower the loan amount to cover the rest needed to get down to an 85% loan.

There are a few exceptions to this policy which you can read in the table below.

An identity of interest transaction is a sales transaction between parties with family or business relationships.

The maximum LTV ratio for identity of interest transactions on principal residences is restricted to 85 percent

Maximum financing above the 85 percent is permitted under certain circumstances. The table below describes circumstances in which financing above the 85 percent is permitted.

Exception

Description

Family Member Purchase

A family member purchases another family member’s primary residence as its primary residence. If the property is not the family member seller’s primary residence, the maximum mortgage is the lesser of

85 percent of the appraised value, or
the appropriate LTV ratio percentage applied to the sales price, plus or minus required adjustments.

Reference: For a definition of the term “family member,” see below

Family memberA family member is defined as a borrower’s

child, parent, or grandparent
spouse
legally adopted sons or daughters
child who is placed with the borrower by an authorized agency for legal adoption, and
foster children.

Note: A child is defined as a son, stepson, daughter, or stepdaughter.

Builder’s Employee Purchase

An employee of a builder purchases one of the builder’s new homes or models as a principal residence.

Tenant Purchase

A current tenant, including a family member tenant, purchases the property where he/she has rented for at least six months immediately predating the sales contract.Note: A lease or other written evidence to verify occupancy is required.The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity of interest relationship.

Corporate Transfer

A corporation