Non-Arms Length Transaction Mortgage 2026: When the Buyer and Seller Are Related

An arms-length transaction is one between two unrelated parties, each acting in their own financial interest, with no special relationship that could influence the sale price. When the buyer and seller are related by blood, marriage, or business, the transaction becomes non-arms-length. This matters because lenders and agencies treat non-arms-length transactions differently, often restricting LTV or requiring additional documentation.

FHA Non-Arms Length Rules

• ✦FHA limits LTV to 85 percent (15 percent down) on non-arms-length purchase transactions when the seller is not the builder or developer of a new property.
• ✦Family member purchases are an exception: if the borrower is purchasing a primary residence from a parent, sibling, spouse, or child, the non-arms-length LTV restriction does not apply and normal FHA LTV applies.
• ✦Employer-to-employee transfers and corporate relocations may also be excepted. FHA publishes specific identity-of-interest guidance in the Single Family Housing Policy Handbook.

Conventional Non-Arms Length Rules

• ✦Fannie Mae and Freddie Mac do not apply a blanket LTV reduction for non-arms-length transactions. However, appraisers are required to note the relationship and comment on whether it influenced the price.
• ✦The appraisal is the key gatekeeping mechanism. If the relationship did not produce an above-market price, there may be no additional restriction.
• ✦Gift of equity: if the seller is giving equity to the buyer, the gift of equity may be treated as down payment subject to the same documentation requirements as a cash gift.

VA Non-Arms Length Rules

• ✦VA requires the appraiser to note if the transaction is between parties with a relationship that could influence the sales price.
• ✦No specific LTV restriction applies solely based on the relationship, but the VA appraiser will scrutinize the comparable selection more carefully.
• ✦VA prohibits financing if the borrower is also the seller, which would be a corporate structure issue in some family transfer scenarios.