Early Occupancy on FHA Loans - Watch out Realtors!!

Mortgage and Lending with Advantage Mortgage

As more and more consumers are turning toward FHA loans, a lot of people in the industry are finding out that there are guidelines that are not exactly intuitive. 

One of the rules that many Realtors and Loan Officers are not aware of is associated with non-arms length transactions between Buyers and Sellers.  For "Identity of Interest" transactions (this is what FHA calls non-arms length transactions) the loan amount is limited to 85% of the lesser of the purchase price or sales price.

When a Buyer is given early occupancy on a purchase, they are effectively a "renter" of the property and the "Identity of Interest" rules may apply.  Not all lenders will interpret this event the same but I have heard from Realtors that have had transactions fall apart because of this issue.

In any event, I'd advise against giving early occupancy on FHA transactions.  It represents a greater risk to the lender and of course to the Seller as well.

Good luck with your listings and sales and thanks for visiting!

Comments (6)

Wendy Rich-Soto, Realtor/Broker Associate
Keller Williams Realty, South Bay - San Pedro, CA
Getting you to your next with a zero failure rate!

At every turn there is a new problem to overcome! Wow!  It seems it is always something.  Thanks for your informative post.

Feb 09, 2010 06:31 AM
Mark Aalto
Advantage Mortgage - Portland, OR
NMLS: 116708

No problem Wendy.  I was an underwriter for two years at the local field office up here for HUD back when we still had one.  The guidelines and manuals are really boring but they become really interesting and exciting when you realize something is a problem.  LOL.

Hope you are well!

Feb 09, 2010 06:49 AM
Charles Dailey
iLoan - NMLS ID#4474 - Saint Paul, MN

Fantastic post!  I didn't know about this.  Thanks for brining it up so I don't end falling on my own face!

Feb 20, 2010 02:37 PM
Mark Aalto
Advantage Mortgage - Portland, OR
NMLS: 116708

No problem Charles.  I really like how you put together your profile - I think you've really done it in a way that shows your personality.  I need to change mine - you've given me some inspiration.  On top of that, I just found another Loan Officer that literally copied my bio page practically word for word.  So, I suppose I ought to change my profile etc to make sure mine is actually unique.

Good luck this year!

Feb 21, 2010 04:32 AM
Ray Smith

Thanks for this post.  I am really confused...I just had a loan denied because of this.  Basically the seller was a property flipper and allowed the potential borrowers to live in the house because the deal was taking so long.  It eventually got denied for unrelated reason, I was able to make it work alas our underwriter claims id of interest because they moved in while deal was going on.  I researched a lot on this and called other mortgage companies and some can do it and got confirmation from local HUD offices that this type of arrangement is not id of interest.  My company will not budge.  Do you know the best way I could contact HUD to get an answer in writing to show my company?

Aug 02, 2010 04:27 PM
Mark Aalto
Advantage Mortgage - Portland, OR
NMLS: 116708

The problem with getting something in writing from HUD is that HUD will only respond in writing to another underwriter so it's unlikely that we'll see a Loan Officer getting a written response.  Probably the best you can do is to get another mortgage company to put something in writing. 

Sounds like your company is looking at this as a landlord selling to a tenant.  If the tenant is there for 6 months it's ok.  Not sure if that helps but depending on how long you have been in the process, maybe you can still make it work.

Aug 03, 2010 05:27 AM