How to Buy a House from a Family Member

When you are purchasing a home from a family member – then there are some extra hoops that you have to jump through.  With FHA, the rules on how to buy a house from a family member allow us to loan you up to 96.5%, as long as the borrower has been renting the property (literally paying rent, not rent free) for at least 6 months.  If we can’t meet the guidelines I’m going to address, then we are limited to a 85% (or 15% down payment) loan.  READ:  I’m writing this, so that we can get it right the first time!

How To Buy A House From A Family Member

FHA Mortgage Lending rules refer to this as an “Identity of Interest” mortgage.  In my situation, if my dad wanted to sell his house to his grandson, it would be Wade Ross Warren, Sr. as Seller to Wade Ross Warren, III as Buyer.  Not hard to see that connection, right?When the property seller is a corporation, partnership or any other business entity it must be ensured that the borrower is not an owner of the business entity selling the property.  If the Agent who is involved in the transaction, the Builder, or the loan officer is connected to the Borrower – then additional “Identity of Interest” questions also come up.

The rules on how to buy a house from a family member do have some specific EXCEPTIONS to the 15% down payment requirement.  To get out of having to make a 15% down payment, FHA allows the following exemptions:

• Someone who works for a home builder, and is purchasing one of the builders new homes to be their primary residence.  FHA does not allow for “Sweat Equity,”  do doing the electrical work, and having the builder pay that money for the down payment, or to reduce the cost of the home, does not work.  Don’t put anything like that in a contract with the Builder.
• Someone who has been renting the property they want to buy for at least 6 months predating the sales contract.  Again, no sweat equity… we had someone who had been living in a home in the mountains for 2 years, and only paid $300 in rent.  The “normal” rent for that property was $950.  The Renter (now Borrower) had been doing repairs in exchange for lower rent.  We had to PROVE the work that was done, the materials they paid for – it was a painful experience for everyone in the transaction.  DOCUMENT EVERYTHING.  We will be required to show a copy of the lease.
• A company transfers an employee to another city, buys that employee’s home and then sells it to another employee.  This is not very common, but I can see where it might happen, especially in a Rural Area.  Relocation companies will need to provide extra paperwork for this type of transaction.
• When you are trying to buy a house from a family member… If a family member has rented the property for at least six months immediately predating the sales contract, you can put a minimum amount down.  If you want to use a down payment assistance program*, there will be additional documents you have to get everyone to sign.  We will need a copy of the lease, the Underwriter could ask for 6 months of on time cancelled checks, and the rent needs to be at a “Normal for the area” amount. 

*Down Payment Assistance Programs available right now in NC.  The amount of money available for the current NC Housing Finance Agency Programs are 3% of the sales price or 5% of the sales price.  The new First Time Home Buyer Program in NC is for a total of $8000.  Because there are so few homes available right now, many first time home buyers are having to ask the Seller to help pay their closing costs.

For most folks, getting the Seller to pay the closing costs, means you are offering more than the Seller wants.  You think the home is going to sell for $216,000 and you ask the Seller to accept $220,000 and pay $4000 in closing costs.  RARELY do we see a situation where the Seller can pay for ALL of a buyer’s closing costs.

When you are trying to figure out how to buy a house from a family member, remember that FHA will also allow for gift funds from family.  So maybe you are buying the house from your in-laws, but your sister and your Aunt, and everybody else can help you with other costs associated with buying the house!

If INCOME is the issue, not credit, then you CAN add a family member as a non-occupying co-borrower.  This is really great home loan program for single parents, who need some interim help!  It’s also a great program for Graduate students who can’t imagine studying AND living in a College Apartment one more year!  The FHA Non-Occupying Co-Borrower program allows for a minimum down payment of 3.5% – but again, the person who is going to live in the house needs a minimum credit score of 620.  If you are hoping to do this in the home that your family owns, there are some additional hoops to jump through, so please call us.  Each situation is slightly different.

What if you want to buy a home from a family member that needs some TLC?  There are Renovation loans that we can offer that can help you fix it up!  There are different down payment requirements for these loans, but in general, you can’t do the work yourself and qualify for the loans – it must be done by a licensed contractor.  We are going to ask for much of the same things we ask for with a straight up Construction Loan for building a new home.

Have more questions about how to buy a house from a family member?  Call us!  We work everyday with first time home buyers who want to buy a home they are living in.  Remember that in most cases, we must have documented 6 months of “real” rent (meaning rent that is normal for the property).  Please call Steve and Eleanor Thorne at 919 649 5058.

Originally Posted at NCFHAExpert.com