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Not every FHA sale gets the standard 96.5% financing. When the buyer and seller already know each other in a way that could distort the sales price — a parent selling to a child, an employer selling to staff, a landlord selling to a tenant — HUD treats the transaction differently to protect against inflated values.
What triggers identity-of-interest treatment
HUD Handbook 4000.1 defines an identity-of-interest transaction as a sale where the buyer and seller have a familial, business, or financial relationship. The concern isn't that these sales are improper — many are perfectly legitimate — it's that a related buyer and seller have less incentive to negotiate at true market value, which matters because FHA is insuring the loan against a price that may not hold up if the loan defaults.
Common triggers include:
- Sale between family members (parent/child, siblings, in-laws)
- Sale between an employer and an employee
- Sale between a corporation and one of its officers or stockholders
- Sale between a landlord and a current tenant
- Sale between business partners or affiliated entities
The 85% LTV restriction
Unless an exception applies, HUD caps financing on an identity-of-interest sale at 85% loan-to-value — a much larger cash requirement than the standard 3.5% down payment used on most FHA purchases (see FHA down payment requirements).
| Scenario | Standard LTV available | Identity-of-interest LTV |
|---|---|---|
| Arm's-length sale, unrelated parties | Up to 96.5% | N/A |
| Parent selling to child (no exception) | N/A | 85% max |
| Employer selling to employee (no exception) | N/A | 85% max |
| Landlord selling to tenant of 5 months | N/A | 85% max |
| Landlord selling to tenant of 6+ months | Up to 96.5% (exception applies) | N/A |
The published exceptions
HUD's exceptions restore standard maximum financing even though a relationship exists, because the specific circumstance reduces the risk of an inflated price:
- A family member purchasing from another family member when the buyer has been a tenant in the property for at least six months immediately preceding the sales contract, paying rent that can be documented.
- A builder selling to one of its own employees — an exception carved out specifically because builder-to-employee sales are common and closely documented.
- A corporation or employer transferring an employee to a new area, and the corporation is selling the transferred employee's home or the employee is buying in the new location — this recognizes relocation sales aren't designed to inflate value.
- A tenant (not a relative) purchasing the property they have rented as their principal residence for at least six months immediately before the contract date.
Outside of these documented exceptions, the 85% LTV ceiling applies regardless of how fair the price appears.
Worked example (illustration only)
Assume an adult child wants to buy their parents' home, valued and priced at $280,000, and has not lived there as a tenant.
- No exception applies, since there's no six-month tenancy documented, so the loan is capped at 85% LTV.
- Maximum FHA loan: 85% × $280,000 = $238,000.
- Required down payment: $42,000 — far more than the roughly $9,800 (3.5%) required on a non-related sale of the same price.
- If that same buyer had instead been renting the home from their parents for the prior eight months with documented rent payments, the family-tenant exception would apply and standard 96.5% financing would be available.
This example is for illustration only; actual underwriting also depends on the appraisal, credit profile, and lender overlays.
Checklist: documenting an identity-of-interest exception
- Gather lease agreements and canceled rent checks or bank statements covering at least six continuous months before the contract date.
- Confirm the relationship type with your loan officer early — before writing an offer — since it affects how much cash you'll need.
- If buying from a builder-employer, get written confirmation of your employment relationship and hire date for the underwriting file.
- For relocation sales, keep the employer's relocation letter or transfer documentation.
- Ask whether your specific relationship (siblings, in-laws, business partners) is treated the same as a parent-child sale — some lender overlays interpret HUD's family definition differently.
If you're not sure whether your transaction qualifies, raise it with your loan officer before you're under contract — the exceptions hinge on documentation that needs to exist *before* the sale, not after. Review FHA appraisal requirements as well, since identity-of-interest sales often draw extra scrutiny on value support.