Emma's Rental House Deal Almost Cost Her Thousands Extra
A Simple Deal That Wasn't So Simple
Emma found out her landlord was ready to sell her the house she'd been renting in Rincon, Georgia, and she thought that made the deal simple. She already knew the home, she already had a relationship with the seller, and she figured financing would be the easy part.
It wasn't. What Emma discovered about how FHA treats that exact kind of sale almost changed how much cash she needed at closing, and most buyers never see this coming until they're already under contract.
What Most Buyers Get Wrong
When you buy a home from someone you already know, a landlord, a family member, a builder you work for, or an employer relocating you, FHA does not automatically treat it like a standard purchase between strangers. These deals fall into a category called an Identity-of-Interest transaction, and that classification comes with its own loan-to-value restrictions.
A situation that comes up often is a renter deciding to buy the home they've been leasing, assuming the mortgage process works exactly like any other purchase. It can, but only if the file is set up correctly from the start.
The Rule, In FHA's Own Words
Here is the actual guideline language. The maximum LTV percentage for Identity-of-Interest transactions on Principal Residences is restricted to 85 percent. The maximum LTV for tenant-landlord transactions is also restricted to 85 percent. Exceptions to the 85% restriction include: Family Member purchasing another Family Member's Principal Residence; tenant purchasing after at least six months of tenancy; builder's employee purchasing a new house; and corporate transfer situations.
In plain terms, buying from someone you know can limit your financing to 85 percent of the home's value, unless you fall into one of those four carve-outs.
How Emma's Situation Worked Out
Emma had been renting the house for well over a year, which put her squarely inside the tenant exception, at least six months of documented tenancy. Because her lease history was on file and dated, we were able to show the underwriter she qualified for standard FHA financing rather than the restricted 85 percent LTV.
The lesson is not that Identity-of-Interest deals are bad. It's that they need to be identified early, and the right documentation needs to be gathered before the file goes to underwriting, not after.
What To Ask Before You Sign Anything
If you're buying a home from a landlord, a relative, your employer, or a builder you work for, ask your loan officer directly: is this classified as an Identity-of-Interest transaction, and if so, which of the four FHA exceptions applies to my situation? Then be ready to provide lease records, proof of family relationship, or employment and relocation documentation to support it.
That one question, asked early, is what kept Emma's financing on track and her closing costs where she expected them to be.
Buying From Someone You Know?
If you're a renter thinking about buying your rental home, or you're purchasing from a family member or an employer, I can help you figure out where you stand before you're locked into a contract. I'm Jason Sharon with Home Loans Inc, and I find the path. Call 843-LOW-RATE, or reach out online. Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
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