FHA Identity-of-Interest Transactions: The Complete Guide to Buying from Family
Your parents are ready to downsize. They want to sell you their home at a fair price, and you want to buy it. Seems straightforward, right?
Not quite. When you buy a home from a family member, FHA classifies this as an "identity-of-interest" transaction, and different rules apply. The default down payment jumps from 3.5% to 15%. Special documentation is required. And while there are specific exceptions that can restore the 3.5% down payment, understanding these rules ahead of time helps you avoid surprises and structure the transaction correctly from the start.
This guide explains exactly how FHA treats family transactions, who qualifies as "family," when exceptions apply, and how to structure a deal that works for everyone. Understanding these rules ahead of time can save you from an unpleasant surprise when you're told you need 15-25% down instead of 3.5%.
What Is an Identity-of-Interest Transaction?
An identity-of-interest transaction is a sale between parties who have a pre-existing relationship that could influence the terms of the sale. FHA is concerned that these relationships could lead to inflated prices, undisclosed side deals, or transactions that don't reflect true market value.
FHA defines two types of identity-of-interest:
- Family member transactions — Sales between relatives (as defined by HUD)
- Business relationship transactions — Sales between parties with existing commercial associations (employer/employee, business partners, etc.)
When FHA identifies an identity-of-interest, the default maximum LTV drops from 96.5% to 85%. That means 15% down instead of 3.5%, which can add tens of thousands of dollars to your required cash at closing.
Who Counts as a "Family Member"?
HUD has a specific definition of family member. This list applies regardless of sex or legal marital status.
FHA's Family Member Definition:
| Relationship | Included Variations |
|---|---|
| Children | Son, daughter, stepson, stepdaughter, legally adopted children, foster children |
| Parents | Mother, father, stepmother, stepfather, foster parents |
| Grandparents | Grandmother, grandfather, step-grandparents, foster grandparents |
| Spouse/Partner | Spouse, domestic partner |
| Siblings | Brother, sister, stepbrother, stepsister |
| Extended family | Uncle, aunt |
| In-laws | Father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law |
Who is NOT on the list:
- Cousins
- Nieces and nephews
- Great-aunts and great-uncles
- Second cousins or more distant relatives
- Friends (regardless of how close)
- Ex-spouses (after divorce is final)
Why this matters: If you're buying from a cousin or a niece/nephew, it's technically not an identity-of-interest transaction under FHA's definition. Standard 96.5% LTV applies.
The Default Rule: 85% LTV (15% Down)
When an identity-of-interest exists, FHA restricts the maximum loan-to-value ratio to 85%.
What this means in practice:
| Purchase Price | Standard FHA (96.5% LTV) | Identity-of-Interest (85% LTV) | Difference |
|---|---|---|---|
| $300,000 | $10,500 down (3.5%) | $45,000 down (15%) | +$34,500 |
| $400,000 | $14,000 down (3.5%) | $60,000 down (15%) | +$46,000 |
| $500,000 | $17,500 down (3.5%) | $75,000 down (15%) | +$57,500 |
The 85% restriction is the default. However, there are several important exceptions that can restore the 96.5% LTV.
Exceptions That Allow 96.5% LTV
FHA provides four specific exceptions where the 85% LTV restriction does not apply.
Exception 1: Family Member Principal Residence to Principal Residence
The rule: You can exceed 85% LTV if you're purchasing the principal residence of another family member, and it will become your principal residence.
Requirements:
- Seller must currently occupy the property as their primary home
- Buyer must intend to occupy the property as their primary home
- Both parties must be family members (per FHA's definition)
Example scenarios that qualify:
- Parents selling their home to their adult child (parents live there now, child will live there)
- Grandparents selling to grandchild (same occupancy requirements)
- Sibling selling their primary home to another sibling
Example scenarios that DON'T qualify:
- Parents selling a rental property to their child (not the parents' principal residence)
- Parents selling their vacation home to their child (not principal residence)
Documentation: Standard purchase documentation plus verification that seller currently occupies and buyer will occupy as principal residence.
Exception 2: Family Tenant for 6+ Months
The rule: You can exceed 85% LTV if you've been renting the property from your family member for at least six months immediately before the sales contract.
Requirements:
- Buyer must have been a tenant in the property for 6+ months
- The six months must be immediately preceding the sales contract date
- Written evidence of tenancy and occupancy required (lease agreement, rent receipts, utility bills in tenant's name, etc.)
Why this exception exists: If you've already been living in the property and paying rent, the transaction is less likely to be a sweetheart deal designed to extract equity. You're simply converting from tenant to owner.
Example:
- Adult child has been renting a property from their parents for 2 years
- Parents decide to sell
- Child can purchase at 96.5% LTV because they've been a tenant for 6+ months
Documentation required:
- Lease agreement or rental agreement
- Proof of rent payments (canceled checks, bank statements showing transfers)
- Utility bills or other evidence showing occupancy
- Verification that tenancy was for 6+ months immediately prior to contract
Exception 3: Builder's Employee Purchase
The rule: An employee of a builder can exceed 85% LTV when purchasing one of the builder's new houses or models as their principal residence.
Requirements:
- Buyer must be an employee of the builder
- Buyer must NOT be a family member of the builder/owner
- Property must be a new house or model home built by that builder
- Buyer must occupy as principal residence
Why this exception exists: Builders often offer employee discounts or preferred purchasing arrangements. FHA recognizes this as a legitimate business practice rather than a suspicious transaction.
Example:
- Construction company employee buys a new home in a subdivision their employer built
- Sales manager at a home builder buys a model home from their employer
Does NOT qualify:
- Builder's son/daughter buying one of the builder's homes (family relationship disqualifies)
- Employee buying a resale home the builder happens to own
Exception 4: Corporate Relocation Transfer
The rule: The 85% LTV restriction doesn't apply when a corporation transfers an employee, purchases that employee's house, and then sells it to another employee.
Requirements:
- Corporation must have transferred the original employee
- Corporation must have purchased the employee's home as part of the relocation
- New buyer must be another employee of the same corporation
- New buyer must occupy as principal residence
Why this exception exists: Corporate relocation programs are standard business practices. The corporation's involvement actually adds a layer of arms-length verification to the transaction.
Example:
- Company relocates Employee A from Dallas to Chicago
- Company buys Employee A's Dallas house as part of the relo package
- Company later sells that Dallas house to Employee B (also a company employee)
- Employee B can purchase at 96.5% LTV
Tenant/Landlord Transactions (Non-Family)
Even without a family relationship, tenant/landlord transactions face the same 85% LTV restriction.
The rule: If a tenant is purchasing a property they currently rent, the maximum LTV is 85%.
The exception: If the tenant has rented the property for at least six months immediately preceding the sales contract, they can exceed 85% LTV.
| Tenancy Duration | Maximum LTV |
|---|---|
| Less than 6 months | 85% |
| 6 months or more | 96.5% |
Documentation required: Same as family tenant exception (lease, rent receipts, proof of occupancy).
Why this rule exists: FHA is concerned about arrangements where a "tenant" is placed in a property specifically to circumvent other restrictions. The 6-month requirement ensures a genuine landlord/tenant relationship existed before the purchase decision.
Non-Occupying Borrower Transactions
When someone co-signs on a loan but won't live in the property, additional rules apply.
Default Rule for Non-Family: 75% LTV
When the non-occupying co-borrower is NOT a family member of the occupying borrower, the transaction is limited to 75% LTV (25% down).
Family Member Exception: Up to 96.5% LTV
If the non-occupying co-borrower IS a family member of the occupying borrower, the LTV can increase to 96.5%.
Example: Parent co-signs on their adult child's FHA loan to help them qualify. Parent won't live in the property. Because they're family members, 96.5% LTV is allowed.
Restrictions on the Family Exception
The 96.5% LTV for family non-occupying borrowers does NOT apply if:
- Family member is selling to a family member who will be a non-occupying co-borrower Example that's restricted: Parents sell their home to their child, and one of the parents stays on as a non-occupying co-borrower on the new loan. This creates a circular transaction that FHA restricts.
- Two-to-four unit properties Non-occupying borrower transactions on 2-4 unit properties remain at 75% LTV even between family members.
| Scenario | Property Type | Max LTV |
|---|---|---|
| Non-family non-occupying borrower | Any | 75% |
| Family non-occupying borrower | 1 unit | 96.5% |
| Family non-occupying borrower | 2-4 units | 75% |
| Family selling to family with non-occ co-borrower | Any | 75% |
Gift of Equity: The Family Advantage
One of the biggest advantages of buying from family is the ability to use a gift of equity as your down payment.
What Is a Gift of Equity?
When a family member sells you a property below market value, the difference between the appraised value and the purchase price can be treated as a gift. This "gift of equity" can satisfy your down payment requirement.
Example:
- Parents' home appraises for $400,000
- Parents agree to sell to their child for $360,000
- The $40,000 difference is a gift of equity
- Child can use that $40,000 toward down payment and closing costs
Who Can Provide a Gift of Equity?
Only family members (as defined by FHA) can provide a gift of equity. This is not available in non-family transactions.
Required Documentation
The gift of equity requires a gift letter signed and dated by both the donor (seller) and the borrower that includes:
- Donor's name, address, and telephone number
- Donor's relationship to the borrower
- Dollar amount of the gift
- Statement that no repayment is required or expected
How Gift of Equity Works: The Contract Structure (Critical)
To use a gift of equity as your down payment, the purchase contract must be written at the full appraised value with the gift explicitly stated.
Example:
Parents' home appraises for $400,000. Parents want to give their child a $40,000 gift of equity. Contract is written for $400,000 with an explicit $40,000 Gift of Equity stated in the contract.
| Element | Amount |
|---|---|
| Purchase price (on contract) | $400,000 |
| Gift of equity (stated in contract) | $40,000 |
| Net amount seller receives | $360,000 |
| Required down payment (3.5% of $400,000) | $14,000 |
| Gift of equity covers down payment? | Yes, with $26,000 excess |
| Remaining gift for closing costs | $26,000 |
| Final loan amount | $386,000 + UFMIP |
On the settlement statement (Closing Disclosure):
- Purchase price shows $400,000
- Gift of equity shows as a $40,000 credit to the buyer
- Seller nets $360,000 (purchase price minus gift)
- Loan amount is based on $400,000 minus down payment
Important note: If the contract is written at the discounted price ($360,000) instead of the full value, the gift of equity doesn't exist as a transaction element. FHA calculates the required down payment based on the contract price, so the buyer would need to bring 3.5% of $360,000 ($12,600) in cash. The contract price determines whether the gift can be used as down payment.
Gift of Equity + Exception = Powerful Combination
If the transaction qualifies for one of the 96.5% LTV exceptions (principal residence to principal residence, or tenant for 6+ months), the gift of equity can cover the entire down payment.
Example:
- Parents selling their primary home to child (qualifies for exception)
- Home appraises for $400,000
- Parents want to provide $20,000 gift of equity
- Contract written at $400,000 with $20,000 gift stated
- Required down payment at 96.5% LTV: $14,000 (3.5% of $400,000)
- Gift of equity covers full down payment plus $6,000 toward closing costs
- Child needs $0 for down payment
Without the exception (85% LTV required):
- Required down payment: $60,000 (15% of $400,000)
- Gift of equity: $20,000
- Child still needs $40,000 cash
Interested Party Contributions: The 6% Rule
In any FHA transaction, interested parties (sellers, agents, builders) can contribute up to 6% of the sales price toward the buyer's costs.
What Counts as Interested Party Contributions?
- Origination fees
- Closing costs (title, escrow, recording, etc.)
- Prepaid items (insurance, taxes, interest)
- Discount points
- Temporary or permanent interest rate buydowns
- Upfront Mortgage Insurance Premium (UFMIP)
What Does NOT Count Toward the 6% Limit?
- Gift of equity (handled separately under gift rules)
- Premium pricing credits from the lender (unless lender is also the seller/builder)
- Real estate agent commissions paid by seller under local custom
- PACE lien satisfaction by the property owner
What Interested Party Contributions CANNOT Be Used For
Interested party contributions cannot be used for the borrower's minimum required investment (down payment). The down payment must come from acceptable sources: borrower's own funds, gift from family, grant programs, etc.
6% Limit Calculation
| Sales Price | Maximum Interested Party Contribution |
|---|---|
| $300,000 | $18,000 |
| $400,000 | $24,000 |
| $500,000 | $30,000 |
Business Relationship Transactions
Identity-of-interest isn't limited to family. Business relationships also trigger the 85% LTV restriction.
What Qualifies as a Business Relationship?
An association between individuals or companies entered into for commercial purposes, including:
- Employer/employee (unless builder exception applies)
- Business partners
- Investors in the same entity
- Corporate relationships (subsidiary buying from parent company, etc.)
Common Business Relationship Scenarios
Scenario 1: Buying from your employer
An employee buying a property from their employer is an identity-of-interest transaction. 85% LTV applies unless the builder's employee exception applies.
Scenario 2: Buying from a business partner
Two partners in a business venture are selling/buying a property between themselves. 85% LTV applies.
Scenario 3: Real estate agent buying their own listing
An agent purchasing a property they listed is an identity-of-interest due to the business relationship with the seller.
No Gift of Equity in Business Transactions
Unlike family transactions, business relationship transactions do not permit gifts of equity. The property must be purchased at or near market value with traditional down payment sources.
Practical Scenarios
Scenario 1: Parents Selling Primary Home to Child
Situation: Parents are downsizing. They want to sell their primary home to their adult daughter. Home appraises for $450,000. Parents want to give her a $30,000 gift of equity.
Correct contract structure:
- Contract price: $450,000
- Gift of equity stated in contract: $30,000
- Seller nets: $420,000
Analysis:
- Identity-of-interest: Yes (family)
- Default LTV: 85%
- Exception available: Yes (principal residence to principal residence)
- Maximum LTV with exception: 96.5%
- Required down payment: $15,750 (3.5% of $450,000)
- Gift of equity: $30,000
- Gift covers down payment plus: $14,250 toward closing costs
Result: Daughter can purchase with 3.5% down, using gift of equity for down payment and closing costs. Contract must be written at $450,000 with gift stated.
Scenario 2: Parents Selling Rental Property to Child
Situation: Parents own a rental property. They want to sell it to their son who will move in and make it his primary home. Property is worth $350,000.
Analysis:
- Identity-of-interest: Yes (family)
- Default LTV: 85%
- Exception available: No (rental property, not parents' principal residence)
- Maximum LTV: 85%
- Required down payment: $52,500 (15%)
Unless: Son has been renting that specific property from his parents for 6+ months. Then the tenant exception applies and 96.5% LTV is available.
Result without tenant exception: Son needs 15% down ($52,500).
Result with tenant exception: Son needs 3.5% down ($12,250).
Scenario 3: Buying from an Aunt
Situation: Your aunt is selling her home. She's offered it to you at a fair price. She lives there now. You'll move in.
Analysis:
- Identity-of-interest: Yes (aunt is on the family member list)
- Default LTV: 85%
- Exception available: Yes (principal residence to principal residence)
- Maximum LTV with exception: 96.5%
Result: You can purchase with 3.5% down.
Scenario 4: Buying from a Cousin
Situation: Your cousin is selling their home. You want to buy it.
Analysis:
- Identity-of-interest: No (cousins are NOT on FHA's family member list)
- Standard FHA rules apply
- Maximum LTV: 96.5%
Result: Standard FHA transaction. 3.5% down. No special restrictions.
Scenario 5: Child Renting from Parents, Then Buying
Situation: You've been renting a house from your parents for 2 years. They've decided to sell it to you. It's not their primary residence (they live elsewhere).
Analysis:
- Identity-of-interest: Yes (family)
- Default LTV: 85%
- Exception available: Yes (tenant for 6+ months)
- Maximum LTV with exception: 96.5%
Documentation needed: Lease agreement, rent payment history, utility bills showing occupancy for at least 6 months immediately before the contract.
Result: You can purchase with 3.5% down.
Scenario 6: Non-Occupying Parent Co-Borrower on Family Sale
Situation: Parents are selling their home to their daughter. Daughter doesn't qualify for the loan on her own income, so Mom will be a co-borrower. Mom won't live in the property.
Analysis:
- Identity-of-interest: Yes (family sale)
- Non-occupying borrower: Yes (Mom won't occupy)
- Family selling to family with non-occupying co-borrower: Yes
The problem: This specific combination, where a family member sells to another family member and one of the sellers becomes a non-occupying co-borrower, is restricted to 75% LTV.
Result: 25% down required ($75,000 on a $300,000 purchase).
Potential workaround: If a different family member (Dad, sibling, grandparent) acts as the non-occupying co-borrower instead of the seller, the restriction may not apply. Consult with your loan officer on structuring.
Scenario 7: Buying from Your Employer
Situation: Your employer is selling a property. You want to buy it for your personal residence.
Analysis:
- Identity-of-interest: Yes (business relationship, employer/employee)
- Default LTV: 85%
- Builder exception: Only if employer is a builder and property is new construction they built
Result (non-builder employer): 15% down required.
Result (builder employer, buying their new construction): 3.5% down allowed.
Scenario 8: Maximum Gift of Equity Strategy
Situation: Parents want to help their child buy their home with minimal out-of-pocket expense. Home appraises for $400,000.
Strategy:
- Contract written at $400,000 (full appraised value)
- Parents provide $40,000 gift of equity (stated in contract)
- Parents net $360,000 at closing
The math:
- Required down payment (3.5%): $14,000
- Gift of equity available: $40,000
- Excess for closing costs: $26,000
Can parents cover even more?
- Parents can also contribute up to 6% as interested party (seller) contribution: $24,000
- Combined assistance: $40,000 (gift of equity) + $24,000 (seller contribution) = $64,000
Result: Child could potentially close with little to no cash out of pocket, depending on actual closing costs.
Important: The contract MUST be written at $400,000 with the $40,000 gift explicitly stated. If the contract is written at $360,000, the gift of equity doesn't exist as a transaction element, and the child would need to bring $12,600 (3.5% of $360,000) in cash.
Documentation Requirements
For All Identity-of-Interest Transactions
- Standard purchase documentation (contract, disclosures, etc.)
- Evidence of the relationship (if not obvious from names/records)
For Principal Residence Exception
- Verification seller currently occupies as principal residence
- Verification buyer will occupy as principal residence
For Tenant Exception (Family or Non-Family)
- Lease agreement or rental contract
- Proof of 6+ months of rent payments (canceled checks, bank statements)
- Utility bills or other occupancy evidence
- Documentation showing continuous tenancy immediately preceding contract
For Gift of Equity
Gift letter signed by both donor and borrower containing:
- Donor's name, address, and telephone number
- Relationship to borrower
- Dollar amount of gift
- Statement that no repayment is required
For Builder's Employee Exception
- Employment verification with builder
- Confirmation property is new construction built by employer
Common Mistakes to Avoid
Mistake 1: Assuming All Family Sales Require 15% Down
Many borrowers (and some loan officers) don't know about the exceptions. If the seller is selling their primary home to a family member who will also occupy it as their primary home, 96.5% LTV is available.
Mistake 2: Not Documenting Tenancy Properly
If you've been renting from a family member and plan to buy, start documenting now. You need 6 months of lease history and rent payments. Informal "I pay my parents rent sometimes" won't qualify.
Critical warnings:
- Rent must be reasonable. If market rent is $2,500/month and you're paying your parents $200/month, underwriters will view this as a disguised "living at home" situation, not a genuine landlord/tenant relationship. The exception may be denied.
- Cash payments are almost never accepted. You need a verifiable paper trail: bank transfers, canceled checks, or documented electronic payments. A handwritten receipt or "we kept track in a notebook" won't satisfy underwriting.
- Payments must be consistent. Six months of sporadic payments with gaps won't qualify. The rent must be paid consistently, like a real tenant would pay.
Mistake 3: Structuring the Non-Occupying Borrower Wrong
Having the seller also be a non-occupying co-borrower triggers the 75% LTV restriction. Structure the transaction so a different family member co-signs if needed.
Mistake 4: Confusing Gift of Equity with Seller Contributions
Gift of equity can be used for down payment. Seller contributions (interested party contributions) cannot be used for down payment. They serve different purposes and have different rules.
Mistake 5: Thinking Cousins Are Restricted
Cousins are not on FHA's family member list. Neither are nieces/nephews. Transactions with these relatives are not identity-of-interest and don't face the 85% LTV restriction.
Mistake 6: Writing the Contract at the Wrong Price for Gift of Equity
This is one of the most costly mistakes in family transactions. If parents want to give a $40,000 gift of equity on a $400,000 home, the contract must be written at $400,000 with the gift explicitly stated. If the contract is written at $360,000 (the "discounted" price), the gift of equity doesn't exist as a transaction element, and the buyer must bring 3.5% of $360,000 ($12,600) in cash. The contract price determines the down payment calculation.
Mistake 7: Not Getting the Appraisal Right
The gift of equity amount is based on the difference between appraised value and purchase price. If the appraisal comes in lower than expected, the gift of equity shrinks. Make sure expectations are realistic.
Mistake 8: Exceeding Interested Party Contribution Limits
Seller contributions above 6% of the sales price are not allowed. Additionally, contributions cannot exceed the borrower's actual closing costs, prepaid items, and allowable fees.
Frequently Asked Questions
Q: Can I buy my parents' house with only 3.5% down?
A: Yes, if your parents currently live there as their primary residence and you will live there as your primary residence. This qualifies for the principal residence exception.
Q: My parents own a rental property. Can I buy it with 3.5% down?
A: Only if you've been renting that specific property from them for at least 6 months immediately before the purchase contract. Otherwise, 15% down is required.
Q: What if I'm buying from my cousin?
A: Cousins are not on FHA's family member list. This is a standard transaction with 96.5% LTV available. No identity-of-interest restriction applies.
Q: Can my parents gift me the entire down payment through a gift of equity?
A: Yes, if structured correctly. The contract must be written at the full appraised value with the gift of equity explicitly stated. For example, if the home appraises for $400,000 and parents want to give $40,000 in equity, the contract is written at $400,000 with a $40,000 gift of equity stated. The gift appears as a credit on the closing disclosure. If you write the contract at the discounted price ($360,000), the buyer still needs to bring 3.5% in cash.
Q: Can seller contributions cover my down payment?
A: No. Seller contributions (interested party contributions) can only cover closing costs, prepaid items, and certain fees. They cannot be used for down payment. Gift of equity can cover down payment.
Q: I've been living in my parents' house rent-free. Does that count as being a tenant?
A: No. You need documented tenancy with regular rent payments. Living somewhere without paying rent is not a landlord/tenant relationship.
Q: I pay my parents rent in cash. Will that work for the tenant exception?
A: Almost certainly not. Underwriters require a verifiable paper trail: bank transfers, canceled checks, or electronic payment records. Cash payments with handwritten receipts are almost never accepted. Additionally, the rent amount must be reasonable for the market. If you're paying $300/month in an area where market rent is $2,000, underwriters may reject the exception entirely.
Q: My sibling and I want to buy our parents' house together, but I won't live there. What's the max LTV?
A: If the parents (sellers) are also staying on the loan as non-occupying co-borrowers, it's 75% LTV. If the parents are completely off the loan and just one sibling is occupying while the other is a non-occupying co-borrower, family non-occupying borrower rules may allow up to 96.5% LTV on a single-family home. Consult with your loan officer on the specific structure.
Q: Does the 6-month tenancy need to be continuous?
A: Yes. It must be 6 months "immediately predating the sales contract." You can't count tenancy from 2 years ago if you moved out in between.
Q: What if the appraisal comes in lower than expected in a family sale?
A: This affects the gift of equity amount. If you wrote the contract at $400,000 with a $40,000 gift of equity but the appraisal comes in at $380,000, the gift of equity is now limited to the difference between the contract price and appraised value—which creates a problem. The contract price cannot exceed the appraised value. You'd need to either reduce the contract price to $380,000 (and the gift accordingly), have the buyer bring more cash, or dispute the appraisal. This is why it's critical to have realistic expectations about value before writing the contract.
Q: Can my employer sell me a house at a discount?
A: Yes, but 85% LTV applies unless the builder's employee exception kicks in (you must work for a builder and buy their new construction). There's no gift of equity from employers; that's only for family members.
Summary Table: Identity-of-Interest LTV Requirements
| Scenario | Max LTV | Notes |
|---|---|---|
| Family sale (default) | 85% | 15% down required |
| Family sale: seller's principal residence → buyer's principal residence | 96.5% | Both must occupy as primary home |
| Family sale: buyer was tenant 6+ months | 96.5% | Must document tenancy |
| Non-family tenant buying (under 6 months) | 85% | Tenant/landlord restriction |
| Non-family tenant buying (6+ months) | 96.5% | Must document tenancy |
| Builder's employee buying employer's new construction | 96.5% | Cannot be family of builder |
| Corporate relo: company sells to another employee | 96.5% | Specific corporate transfer scenario |
| Business relationship (non-builder) | 85% | No exceptions typically available |
| Non-occupying co-borrower (non-family) | 75% | 25% down required |
| Non-occupying co-borrower (family, 1 unit) | 96.5% | Family exception |
| Non-occupying co-borrower (family, 2-4 units) | 75% | No family exception for multi-unit |
| Family selling to family with seller as non-occ co-borrower | 75% | Circular transaction restricted |
| Cousin, niece/nephew (not on family list) | 96.5% | Standard transaction, no restriction |
The Bottom Line
Buying from family with an FHA loan is absolutely possible, and in many cases, you can still put only 3.5% down. The key is understanding which exception applies to your situation:
- Principal residence to principal residence: If your family member is selling their home (where they live) and you'll live there too, you qualify for 96.5% LTV.
- Tenant for 6+ months: If you've been renting the property from your family member for at least 6 months with documented lease and payments, you qualify for 96.5% LTV.
- Gift of equity: Family members can sell below market value, and the discount becomes a gift that can cover your down payment.
- Know who's on the list: Cousins, nieces, and nephews are NOT on FHA's family member list. Transactions with them are standard, with no restrictions.
If you're planning to buy from family, discuss the structure with your loan officer early. Small changes in how the transaction is set up (who's on the loan, who's occupying, how long you've been a tenant) can mean the difference between 3.5% down and 15% down.
Questions about buying a home from family with an FHA loan? Drop them in the comments.
Note: Lender overlays may impose additional requirements beyond FHA's base guidelines. Some lenders may have stricter documentation requirements or additional restrictions on identity-of-interest transactions.
I'm a licensed loan officer (NMLS 81195) with over 20 years of experience originating FHA loans nationwide.
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Posted Feb 26, 2026, 3:23 AM UTC