Renters who want to purchase their dwelling from their landlord can do so using an FHA loan. You can also use FHA loans to buy a house from a family member. But in certain circumstances, lenders in these transactions may require a higher down payment than is typical for FHA loans. Here’s a primer on using an FHA loan to buy from your landlord or a family member.
“Identity of interest”
The down payments required for FHA loans are sometimes as low as 3.5 percent. But if the parties to a home sale transaction have an “identity of interest,” as defined in certain FHA loan rules, lenders will require a down payment of at least 15 percent.
What does the identity of interest mean? HUD rule 4000.1 defines an identity of interest transaction as one “between parties with an existing Business Relationship or between Family Members.” This includes a landlord-tenant relationship.
Exceptions to the rule
Unless the seller has offered an “inducement to purchase” (see below), lenders will not require the higher down payment in these two circumstances:
- The buyer is purchasing a principal residence from a family member who also used it as a principal residence.
- The buyer is purchasing a family member’s home in which he has been a tenant for the six months immediately preceding the sale. The FHA will require a written lease or other documentation of this relationship.
Allowing a tenant to live in a property rent-free or at a rate below market value is considered an inducement to purchase. If the landlord has been providing such an inducement, the FHA lender is required to reduce the loan by an equivalent amount, thus increasing the amount needed for a down payment.
Related – Homeownership Incentives for First-Time Buyers