Identity of Interest Transaction Mortgage 2026: FHA and Conventional Rules

An identity of interest transaction occurs when the buyer and seller have a relationship that goes beyond a typical arms-length transaction. This includes employer-employee sales, builder-to-buyer relationships with the builder financing the purchase, investor-to-investor deals, and transactions where a third party has a financial interest in both sides of the sale. FHA defines identity of interest explicitly. Conventional programs handle it through appraisal scrutiny rather than specific program restrictions.

FHA Identity of Interest Definition and LTV Limit

• ✦FHA defines identity of interest as a sale between parties with a business relationship, a close friendship, a family relationship, or any situation where the seller retains a financial interest in the property after closing.
• ✦The FHA LTV limit for identity of interest transactions is 85 percent. The borrower must put down at least 15 percent.
• ✦Exception 1: the borrower has been a tenant in the property for at least 6 months before signing the purchase agreement. In that case, normal FHA LTV applies.
• ✦Exception 2: the borrower is a family member purchasing the primary residence of the seller, and the seller is relocating. Normal FHA LTV applies.
• ✦Exception 3: the borrower is an employee purchasing from a nonprofit employer-assisted housing program. Normal FHA LTV may apply.

Common Scenarios That Trigger Identity of Interest

• ✦Employer selling company-owned property to an employee
• ✦Builder selling to a company officer or family member
• ✦Real estate investor purchasing from another investor in the same investment group
• ✦Mortgage broker purchasing a property where they are originating the loan on their own transaction (additional conflicts arise beyond identity of interest)

Conventional Treatment

• ✦Fannie Mae and Freddie Mac do not have an identity-of-interest LTV restriction. The appraisal is the gatekeeping mechanism.
• ✦If the buyer and seller have a disclosed relationship, the appraiser must comment and support the market value conclusion against arms-length comparable sales.
• ✦Lenders may apply their own overlays for identity of interest transactions even when Fannie or Freddie guidelines do not require it.