FHA Identity of Interest Transactions: The 85% LTV Cap, Eligible Exceptions, and Common Trigger Scenarios

An FHA identity of interest transaction occurs when the buyer and seller have a pre-existing relationship. The rule exists to prevent fraudulent inflation of the purchase price when arms-length market conditions are absent. Triggering this rule without recognizing it before submission results in a condition that can reduce the LTV to 85% and change the borrower's down payment requirement mid-process.

What Triggers Identity of Interest

• ✦Family member purchases from a family member (parent, sibling, child, spouse, grandparent, aunt, uncle)
• ✦Employer purchases from an employee or employee purchases from an employer
• ✦Business partners purchasing from one another
• ✦Tenant purchasing the property they are currently renting
• ✦A corporation purchases property from one of its shareholders
• ✦Real estate agent purchasing a property listed by their own brokerage where they represent the buyer

The 85% LTV Maximum

When an identity of interest exists, the maximum LTV under FHA is 85%, not the standard 96.5%. This means the borrower needs a 15% down payment instead of 3.5%. The loan amount cannot exceed 85% of the appraised value or purchase price, whichever is lower. This is a significant change from the borrower's original planning and must be disclosed at application if an identity of interest relationship is present.

Eligible Exceptions to the 85% Cap

• ✦Tenant purchase: a tenant who has rented the property for at least 6 months prior to the sales contract date may be eligible for 96.5% LTV even in an identity of interest transaction
• ✦Employee relocation: an employee who is purchasing a principal residence from their employer as part of a documented relocation program may qualify for the full 96.5% LTV
• ✦Family member inheritance: a family member purchasing a property from an estate is not subject to the identity of interest rule
• ✦Builder purchase: a builder selling a newly constructed home to an employee does not trigger identity of interest if the builder is in the business of construction and sale