These are important for FHA loan applicants to understand when looking into their financing options. In this article, we will explore some of the basics of identity of interest transactions and answer frequently-asked questions about how they relate to FHA mortgage loans.
“Identity of interest” is a common term used in the lending industry, and it refers to situations in which two parties involved in a transaction have a common ownership stake. This could be siblings, spouses, parents and children, or business partners who hold one another’s stock or other assets. The most common situation involves family members, though it can also involve friends or business associates.
When it comes to FHA loan eligibility, identity of interest transactions take on added significance. The FHA has strict guidelines about these types of transactions, and it requires that all parties involved be “arms-length”—in other words, not related in any way by blood or marriage.
Let’s look at a few common questions that arise when it comes to identity of interest transactions and FHA loan eligibility.
Q: How does the FHA define an identity of interest transaction?
A: An identity of interest transaction is any transaction between two parties who have a common ownership stake. This could include but is not limited to siblings, spouses, parents and children, or business partners who hold one another’s stock or other assets.
Q: Does an identity of interest transaction affect FHA loan eligibility?
A: Yes. The FHA has strict guidelines regarding identity of interest transactions and requires that all parties involved be “arms-length”—in other words, not related in any way by blood or marriage.
Q: What are the consequences if an identity of interest transaction is found to have occurred?
A: If an identity of interest transaction is found to have occurred, it can result in a denial of the loan application or the withdrawal of an existing loan approval. This can result in significant delays to the loan process and may even lead to a financial penalty in some cases.
Q: Are there any other situations in which identity of interest transactions may be relevant?
A: Yes. Identity of interest transactions are also relevant for homeowners seeking to refinance existing loans. In this case, all parties must comply with the FHA’s “arms length” rule, or else the borrower may face significant delays or a denial of the loan application.
Summary and Analysis:
Identity of Interest Transactions refer to those in which two parties have a common ownership stake and involve family members, friends, or business associates. It is an important concept to consider when applying for an FHA loan as the Federal Housing Administration (FHA) has strict guidelines regarding such transactions. FHA loans require that all parties involved have no relations by blood or marriage which is known as the ‘arms length’ rule. A breach of this rule can result in denial of the loan application or withdrawal of an existing loan approval.
In addition to its relevance for applicants, identity of interest transactions are also relevant for homeowners seeking to refinance an existing loan. In this case, the FHA's 'arms length' rule must still be abided by in order to avoid delays or a potential denial of the loan application.
Identity of Interest Transactions are an important concept to understand when applying for an FHA loan due to the FHA's strict adherence to the 'arms length' rule. Failure to abide by this rule could lead to serious delays or denials of the loan application and should be taken into consideration when applying for an FHA loan.
This article was contributed on Aug 12, 2023
