Renting the home we wish to buy with FHA loan...have run into a situation

[Anonymous]

We have been renting the home we intend to purchase since November 2009, in order to build our credit back up from a midscore of 580.  In February, we were pre-approved for an FHA loan as our mid scores had risen to 658.  We signed all our paperwork (GFE/TIL, etc) and our closing date was set for March 19.

Around March 10, we received word that we would not be able to close on the 19th because of some FHA rule regarding renting the home you intend to buy.  We were told we had to live in it a minimum of 6 months.  Of course, this just upset everyone, however, the closing date was pushed back to May 1.

We are not sure if our loan officer is being forthright with us (and it wouldn't be the first time, to be frank), so I did some research and found this post on Yahoo:

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We have been living at the home we are trying to buy for the last 3 months. Everything was good to go and we were supposed to close next week. That is until the underwriter discovered we live here and is now saying FHA won't approve the loan unless we have lived here for at least 6 months. Is this true? Is there anyway around this?

Best Answer - Chosen by Asker

Here's the situation:

If you are trying to buy the house you are currently renting AND are somehow related to the owners, then the FHA rule "Identity of Interest" applies. If you are not related, in any way, then you need to talk to your lender and have them straighten this out with a full explanation.

FYI: What is an "Identity of Interest?"

FHA defines an "identity of interest" as any relationship where the purchaser and seller are related, and/or affiliated through a business relationship. This could, for example, be parent/child as buyer/seller, corporation selling to an employee, persons who are partners in other projects as buyer/seller. FHA restricts the loan to value on such loans to 75% of the lesser of the property value plus closing costs or acquisition cost for investor properties/non-occupying co-borrower
transactions; or 85% of the lesser of the property value plus closing costs or acquisition cost for owner occupied properties.

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Can someone verify that this is correct?  Thank you for any input!

[ShanetheMortgageMan]

If you rented the home on a lease-to-own agreement, and had no previous relationship (personal or business) with the seller, then you should be eligible for maximum financing without being there for 6 months. Otherwise, it is a 6 month wait.  Here are what FHA guidelines say:

A. Identity-of-Interest Transactions. Identity-of-interest transactions on principal residences are restricted to a maximum LTV ratio of 85 percent. Identity-of-interest is defined as a sales transaction between parties with family relationships or business relationships. However, maximum financing above 85 percent LTV is permissible under the following circumstances:

1. A family member purchases another family member's home as a principal residence.

If a property is sold from one family member to another and is the seller's investment property, the maximum mortgage is the lesser of either:

a. 85 percent of the appraised value, or

b. The appropriate LTV ratio percentage applied to the sales price, plus or minus required adjustments.

The 85 percent limit may be waived if the family member has been a tenant in the property for at least six months

A. Identity-of-Interest Transactions. Identity-of-interest transactions on principal residences are restricted to a maximum LTV ratio of 85 percent. Identity-of-interest is defined as a sales transaction between parties with family relationships or business relationships. However, maximum financing above 85 percent LTV is permissible under the following circumstances:

1. A family member purchases another family member's home as a principal residence.

If a property is sold from one family member to another and is the seller's investment property, the maximum mortgage is the lesser of either:

a. 85 percent of the appraised value, or

b. The appropriate LTV ratio percentage applied to the sales price, plus or minus required adjustments.

The 85 percent limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.

2. An employee of a builder purchases one of the builder's new homes or models as a principal residence.

3. A current tenant purchases the property that he or she has rented for at least six months immediately predating the sales contract. (A lease or other written evidence must be submitted to verify occupancy.)

4. A corporation transfers an employee to another location, purchases that employee’s home, and then sells the home to another employee

[Anonymous]

Hi Shane, thank you for answering my question. We are not related to the seller nor have we had any relationship whatsoever to her. The house was for vacant and for sale in October 2009. We put in an offer and it was accepted, with a closing date of Nov.1, 2009.  We attempted to get FHA financing at that time with a 580 mid, and were rejected.  We asked the seller for a 3 month lease addendum, so that we could go ahead and move in while working on our credit, and the seller agreed since she had already moved out of the house.  In February 2010, we had to get another 2 months added to that in order to close late March, and the seller agreed to the extension. Now we have had to ask for one more month because of this debacle (our poor seller, who btw is very nice in emails and such). So the original contract is still valid (hopefully) as we're all in agreement that we will close at the end of April now, with all amendments to that end signed on the dotted line.

So, that's why I was interested in finding out what the real story is.  It sounds to me like we shouldn't have had a delay. 

[ShanetheMortgageMan]

Have you provided the loan officer/underwriter with the background information on how you two met?  To originally purchase the home in the first place?  Do you still have that contract from October?  See they just don't want you to have started things off as a tenant/landlord relationship, which quickly turned into you wanting to buy the home from them... but if your initial intentions were to buy from the get go, but your situation just wasn't quite there to be able to qualify, I think an underwriter would be likely to make an exception.  Key is documentation though.  If the underwriter is nervous about FHA accepting the situation, ask them to put a phone call into the FHA HOC (Home Ownership Center) that covers your area to ask the question... that is what the FHA HOC's are for, when underwriters need a little more guidance.

[Anonymous]

Oh yes, they know all about this whole thing.  Heck, it was the loan officer and our real estate agent that suggested we do this to begin with.  I am really irked the underwriter didn't know to call.  Should she have known to do so?  Their reasoning (the loan officer, realtor, and underwriter) was, and I quote, "We felt like it was just too vague of a rule and this was safer, to wait."  I have to tell you, I am mad as he*l over this situation...but should I be?

[DallasLoanGuy]

Sounds like the underwriter didn't do their job.

Vague? Then call the bank you intend to sell the loan to and get a clarification.