FHA Identity of Interest: Guidelines & Requirements

Buying a home from someone you know may seem like a dream come true, but there are a few things to consider before committing to this type of deal, especially if you’re using an FHA loan to finance your home purchase. The Federal Housing Administration (FHA) has additional guidelines for borrowers who want to purchase a home from someone they know personally or professionally. Failure to follow the FHA’s guidelines could lower your chances of approval. Before you start drawing up a real estate contract, here is what you should know as a borrower about FHA identity of interest and the potential impacts it can have on your home purchase.

What is FHA identity of interest?

FHA identity of interest is the recognition of a preexisting relationship or connection between a property’s buyer and seller. The FHA considers a home purchase where the seller and the buyer know each other as a FHA identity of interest transaction. 

Buying a home from a parent, sibling, co-worker, employer, or landlord are all considered identity of interest deals. These types of real estate agreements are often referred to as non-arms-length transactions.

The FHA wants to know when an identity of interest exists, because the relationship between the buyer and seller could influence the terms of the purchase contract. Buying a home from a familiar face might motivate you to skip steps that are normally taken, such as getting a home inspection or including contingencies in your contract. 

Buyers and sellers often forgo these essential steps to speed up the sales process and demonstrate good faith. However, since the FHA is guaranteeing the loan, they want to make sure the deal is legitimate to avoid future disagreements about the home’s worth.

What are the FHA identity of interest guidelines?

FHA identity of interest guidelines exist to avoid conflicts of interest and ensure fair practices in FHA-backed transactions. These guidelines protect against potential fraud and misuse of mortgage funds by clearly stating what is and isn’t allowed in a real estate deal insured by the FHA. Some of these guidelines are:

• The maximum loan-to-value (LTV) ratio is 85%.
• Borrowers must make a down payment of 15% instead of 3.5% unless exempted. 
• Sellers might have to keep their sales price below a certain threshold.
• Borrowers and sellers might need to include additional documentation, such as a gift letter or proof of occupancy, to justify purchase contract terms and verify FHA compliance.

What do I need to fill out a FHA identity of interest form?

A FHA identity of interest form is a document FHA borrowers use to indicate their preexisting relationship with the seller. It’s important to accurately and thoroughly fill out this form to avoid delays and increase your chances of approval. Borrowers might need the following information to fill out their FHA identity of interest form:

• Proof of your personal or professional relationship with the seller.
• Documentation confirming you’ve lived in the property you’re purchasing for the last six months, such as a lease agreement.
• Evidence that your employer has relocated you, such as an updated work contract.
• Property details, such as location, square footage, and buyer history.

How does FHA identity of interest impact borrowers?

When an identity of interest exists, FHA borrowers should consider two key factors:

Higher down payment requirement

FHA loans typically require a minimum down payment of 3.5%. However, an FHA loan used for an identity of interest transaction requires a minimum down payment of 15% to meet the FHA’s 85% LTV limit. If your primary motivation for getting a FHA loan is a low down payment, you might want to consider alternative mortgage options. 

However, if you’re applying for a FHA loan with a credit score between 500 and 579, you’ll have to pay a higher down payment, anyway (10% to be exact). In this case, you might not mind paying 5% extra on your down payment. 

Some exemptions allow borrowers to forgo the 15% down payment requirement. If you don’t qualify for an exemption and a 15% down payment is unaffordable, you could either purchase a different property from someone you don’t know or apply for a different loan with a low down payment requirement. 

Longer approval time

As soon as an identity of interest is reported, the FHA loan office begins to examine the non-arms-length transaction. Since these transactions are individually assessed, borrowers can expect longer approval times. FHA loan officers often ask for additional documentation if you apply for an exception, which can set back your approval date even more. 

What are the FHA identity of interest exceptions?

Certain FHA identity of interest transactions don’t require borrowers to pay the 15% minimum down payment or meet the 85% LTV maximum. Specific exceptions exist to the 15% down payment rule when purchasing a home from a family member, employer, or landlord. To qualify for the FHA identity of interest exemption, you must meet one of the following criteria:

Employer relocation

When purchasing a home from your employer as part of your relocation package, the home purchase must be linked to your relocation agreement to be exempt from the 15% down payment requirement. 

Family member purchase

If you’re buying a home from a spouse, fiance, or other family member, the home must be your loved one’s primary residence. You must have also lived there for at least six months before purchasing the home to be exempt from the higher down payment minimum. 

Landlord sale

The “FHA identity of interest 6-months” rule also applies when a borrower purchases their landlord’s property. If you’re buying a home from your landlord and you’ve lived in the home for at least six months, you might be exempt from a 15% down payment.

Case-by-case circumstances

The FHA also offers down payment exemptions on identity of interest transactions in exceptional circumstances. Home purchases due to unforeseen life events, such as inheritance or divorce might qualify for an exemption. Home purchases involving non-profits might also merit a down payment exemption. These situations are reviewed on a case-by-case basis. 

How can FHA borrowers avoid a higher down payment on a FHA identity of interest transaction?

If no FHA identity of interest exemption applies to your situation, there are other ways to avoid paying a higher down payment on a FHA loan — particularly, when purchasing a home from a family member. 

Home equity gift

Ask the seller to gift you at least 15% home equity through a discount. This would require the seller to sell you the home for 15% less than its market value. The difference between the home’s market value and sales price would be your home equity gift which could be used to pay for the 15% down payment requirement. Typically, only family members are willing to lower the home’s sales price by 15%. 

Down payment gift 

Another way to fund your 15% down payment is by asking one or more family members for a down payment gift. In a 2024 Zillow Survey, 31% of mortgage buyers reported financing at least part of their down payment with gifts from a family member or friend. Each family member would need to draft and sign a gift letter stating that the funds are a down payment gift and not a loan that needs to be repaid. Both your lender and the FHA loan office will require a copy of each gift letter.

Final thoughts on FHA identity of interest transactions

Many borrowers prefer FHA loans due to their low down payment requirements and lenient borrower criteria. However, if you’re purchasing a home from someone you know with a FHA loan, your down payment requirement could quickly jump to 15%. 

Purchasing from a family member, landlord, or employer might exempt you from a 15% down payment if you’ve lived in the home for the last six months, or if you’re buying a home from your employer as a part of your relocation agreement. 

To receive an exemption, you’ll need to include written documentation of these conditions. Be sure to have all necessary paperwork ready when filling out your FHA identity of interest form.

To learn more about FHA loans and their requirements, speak with one of our loan officers at Zillow Home Loans*. We’ll guide you through every step of the mortgage process. We even offer FHA loans, in addition to several other home financing options, so you can determine which mortgage is right for you.

*An equal housing lender. NMLS #10287