"Can I Buy a Home From a Relative or a Business Partner With an FHA Loan?"

The two of you have run the shop together for eleven years, and for the last three of them your partner has been talking about moving closer to his grandkids. This week he made it real: he is selling the home, and before it goes to anyone else he wants to know if you want it. You said yes before he finished the sentence. You have been in that kitchen a hundred times, and you already know which window sticks. With an FHA loan, the amount you need to bring to closing depends on who is selling, and a business partner is the seller FHA treats most carefully.

Yes, you can. FHA calls a sale between family members or business partners an identity-of-interest transaction and limits the loan to 85 percent of the home's value, which means 15 percent down. That cap lifts when you buy the home a family member lives in, or a home you have rented for six months, so a business partner's sale stays at the cap unless you have been renting the home.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, NMLS #483943, through C2 Financial Corporation, licensed in fifteen states. Every one of these files comes down to whether the seller fits one of FHA's exceptions, so that is where we will spend most of our time.

What is an identity-of-interest transaction?

FHA's definition is in Handbook 4000.1, II.A.2.b, Loan-to-Value Limits, revised 02/16/2021, and it is one sentence: "An Identity-of-Interest Transaction is a sale between parties with an existing Business Relationship or between Family Members." The same section adds: "Business Relationship refers to an association between individuals or companies entered into for commercial purposes."

In plain terms, the seller is your relative, or the seller is somebody you are in business with. Family Member is a defined term in the Handbook too, so your lender checks the relationship against FHA's own definition rather than the way your family uses the word at dinner.

Once the sale fits that definition, the section sets the cap: "The maximum LTV percentage for Identity-of-Interest transactions on Principal Residences is restricted to 85 percent." LTV is the loan-to-value ratio, meaning the loan amount divided by the value FHA uses for the home. For an ordinary purchase, the same section allows 96.5 percent of what FHA calls the Adjusted Value. FHA's Maximum Mortgage Amounts section, II.A.2.a, revised 01/01/2025, sets that figure for a purchase at the lower of the price you are paying and the appraised value. So 96.5 percent is the familiar 3.5 percent down, and an identity-of-interest sale moves it to 85 percent, which means you are bringing 15 percent instead.

FHA asks for more of your own money in the home because a price agreed between two relatives or two partners has not been tested the way a listed sale tests one. FHA loans are still a good fit for plenty of these purchases, as long as you know which version of the rule you are under before anyone writes a number down.

The family exceptions that lift the cap

The section lists four exceptions, and the first one is written for families. Under (a), Family Member Transactions, the restriction may be exceeded if you purchase, as your principal residence, either of these:

• "the Principal Residence of another Family Member," or
• a property owned by another family member that you have rented for "at least six months immediately predating the sales contract." A lease or other written evidence to verify tenancy and occupancy is required.

So if your mother is selling you the home she lives in, and you are going to live in it, you are back to normal FHA financing. The same is true if your parents own a rental you have lived in for at least six months when the contract gets signed, as long as you have the lease to prove it.

A rental your brother owns that you have never lived in stays at the 85 percent cap, because it is neither his principal residence nor a home you rented from him. A relative's vacation home works the same way, so the exception is narrower than the word family suggests.

A relative selling to you can also discount the price, and FHA treats that discount as a gift of equity. Handbook 4000.1, II.A.4.d, revised 08/19/2024, says "Only Family Members may provide equity credit as a Gift on Property being sold to other Family Members." How a gift of equity becomes your down payment is its own subject.

The other three exceptions

The section also lifts the cap for a builder's employee buying one of the builder's new homes, under (b), and for a corporate transfer, under (c). Neither of those reaches a sale from a relative or a partner. The one that can is (d), Tenant Purchase: the cap may be exceeded "if the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the sales contract," with a lease or other written evidence required. That exception does not ask who the landlord is, and buying the home you rent from your landlord walks through it in full.

Buying from a business partner

A business partner is not on that list of exceptions. Unless you have been your partner's tenant in that same home for at least six months when the contract gets signed, the FHA loan is capped at 85 percent of the value, and the remaining 15 percent comes from you.

A partner's discount is simply a lower price. The gift of equity language in II.A.4.d is limited to Family Members selling to Family Members, so a partner who knocks $20,000 off the price has not created a down payment for you. The loan is measured against the lower of the price and the appraised value, and so is your 15 percent.

The 15 percent can come from your savings, and gift funds from an acceptable donor are allowed on FHA, so how gift money gets documented is worth a read. A conventional loan treats the sale differently, and I would rather price both for you than have you assume either one.

A relative who signs the loan but will not live there

Your parents are selling you their home, and they are also willing to stay on the loan to help you qualify. The Handbook has a specific answer for that combination.

II.A.2.b sets the maximum LTV at 75 percent when one or more of the signers will not live in the home. That cap can be raised to 96.5 percent when everyone on the loan is a Family Member, "provided the transaction does not involve: a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or a transaction on a two- to four-unit Property."

If your parents sell you their home and stay on the loan as non-occupying co-borrowers, the lift to 96.5 percent is off the table, and the loan is capped at 75 percent. The seller cannot be the relative who props up the file. A different relative who is not selling can still be a non-occupying co-borrower, and what co-signing a mortgage does to a parent's own finances is worth reading with them before anyone volunteers.

One more line from the top of II.A.2.b governs all of this: "The Mortgagee must apply the lowest applicable LTV percentage as determined under the requirements in this section." If two restrictions reach your file, the lower one wins.

If you are buying a home for a parent to live in rather than buying a parent's home, that is an occupancy question instead, and buying a home for a parent to live in covers it.

Planning the down payment before the contract is signed

The six-month tenancy test is measured from the date the sales contract is signed, so anything that depends on it has to be worked out before that date. This is the order I would go in with you:

1. You tell me who the seller is and how you know them. The relationship gets disclosed on the file either way, and knowing it on day one is what lets us plan instead of react.
2. We work out which version of the rule your sale is under. A relative's own principal residence and a home you have rented from anyone for six months both keep normal FHA financing. Anything else is the 85 percent cap.
3. We check the calendar against the six months. If you have been renting the home for four months, the six-month mark is a reason to set the contract date later. Please provide the signed lease and your bank statements showing each rent payment for those six months, all pages, please.
4. We settle who will be on the loan. A seller who stays on as a non-occupying co-borrower drops the cap to 75 percent, so that gets decided before the contract rather than after.
5. You get pre-approved and we run the scenario before any number is written down. On a sale with no listing behind it, the appraisal is the one opinion of value that neither of you produced, and the loan is measured against it.

The mistakes that cost the most on these files

The relationship comes up late. The underwriter learns the seller is your partner from the contract or the title work, and the down payment plan was built on 3.5 percent. The fix is to tell me on day one.

The word family gets stretched. FHA defines Family Member, and the family exception also requires the home to be the relative's own principal residence or one you have rented for six months. A relative's rental you never lived in does not qualify.

A partner's discount gets treated as a down payment. Under FHA, only a family member can give a gift of equity. A partner's discount lowers the price, and the 15 percent gets figured against the lower figure.

The seller stays on the loan. Parents selling to a child and co-signing without living there puts the file under the 75 percent cap. A relative who is not the seller can fill that role instead.

Six months of tenancy with nothing in writing. The Handbook asks for a lease or other written evidence of tenancy and occupancy. A signed lease and the bank statements showing the six rent payments, all pages, settle it.

An illustration

Numbers below are made up to show the mechanism, and they are not a quote. The loan amounts are shown before the upfront mortgage insurance premium that FHA adds to the loan.

Say the home is priced at $300,000 and appraises at $300,000.

The seller is	Cap	Maximum FHA loan	Your down payment
A stranger, after a listing	96.5 percent	$289,500	$10,500
Your mother, selling the home she lives in	96.5 percent	$289,500	$10,500
Your business partner	85 percent	$255,000	$45,000
Your brother, selling a rental you never lived in	85 percent	$255,000	$45,000
Your mother, selling her home and co-signing without living there	75 percent	$225,000	$75,000

The difference between the second row and the third is $34,500 on the same home at the same price. The last row costs $64,500 more than the second row for the identical purchase, and the only thing that changed is that the seller also signed the loan without living there.

Your next step

You can tell me who the seller is, how you know them, and whether anyone else will be on the loan. Then you can price the scenario before you and the seller settle on a number, because that is what decides your down payment.

Common questions

Can I use an FHA loan to buy a home from a family member?

Yes. FHA Handbook 4000.1, II.A.2.b calls a sale between family members an identity-of-interest transaction and limits the loan to 85 percent of the value on a principal residence. That limit does not apply when you are buying another family member's principal residence as your own. It also does not apply when you buy a family member's property that you have rented for at least six months immediately before the sales contract, with a lease or other written evidence required.

How much do I have to put down when buying from family with an FHA loan?

It depends on the home. If you are buying the home your relative lives in, or a home you have rented from the relative for at least six months, the ordinary FHA minimum of 3.5 percent applies. If the home is a relative's rental or second home that you have not rented for six months, Handbook 4000.1, II.A.2.b caps the loan at 85 percent, which means 15 percent down.

Does the FHA 85 percent rule apply if I buy my business partner's home?

Yes. Handbook 4000.1, II.A.2.b defines a Business Relationship as an association between individuals or companies entered into for commercial purposes, and a sale between parties with that relationship is capped at 85 percent on a principal residence. The exceptions cover family members, a builder's employees, corporate transfers and tenants of at least six months. A business partner is not among them, so you need 15 percent down on the FHA loan unless you have rented that home from your partner for six months.

Can my parents sell me their home and also co-sign the FHA loan without living there?

They can, and it lowers the loan limit. Handbook 4000.1, II.A.2.b sets the maximum LTV for a loan with a non-occupying co-borrower at 75 percent. It allows 96.5 percent for family members only when the transaction does not involve a family member selling to a family member who will be a non-occupying co-borrower. A parent who is the seller cannot be the relative who lifts that cap, and a different relative who is not selling can be.

Is a discount from my business partner a gift of equity under FHA?

No. Handbook 4000.1, II.A.4.d says only family members may provide equity credit as a gift on a property being sold to other family members. A partner who sells to you below the appraised value has given you a lower price, and FHA measures the loan, and your 15 percent, against the lesser of the price and the appraised value.

Estimates and educational information are not a loan approval or commitment to lend.