Certain types of loan transactions affect the amount of financing otherwise available and the calculation of the maximum mortgage. This section details those circumstances.
| a. | Identity-of-Interest Transactions. Identity-of-interest transactions are usually restricted to a maximum loan-to-value ratio of 85 percent. Identity of interest is defined as a transaction between family members, business partners, or other business affiliates. |
However, the maximum Section 184 Program loan-to-value ratio (see Paragraph 5.16) is permissible under the following identity-of-interest circumstances:
| 1. | A family member purchasing another family member’s principal residence or unimproved land for development under the Program. |
| 2. | An employee of a builder purchasing one of the builder’s new homes or models as a principal residence. |
| 3. | A current tenant purchasing the property that he or she has rented for at least six months predating the sales contract. A lease or other written evidence must be submitted verifying occupancy. |
| 4. | Sales by corporations that transfer employees out of an area, purchase the transferred employee’s home, and then resell the residence to another employee. |
If a property being sold from one family member to another is the seller’s investment property, and it is being sold under its appraised value, the maximum mortgage is the lesser of:
| 5. | 85 percent of the sum of the appraised value; or |
| 6. | The 97.75 or 98.75 percent LTV computation applied to the borrower’s acquisition cost. |
| b. | Nonoccupying Co-Borrowers and Co-Signers |
| 1. | When there are two or more borrowers, but one or more will not occupy the property as a principal residence, the maximum mortgage is usually limited to a 75 percent loan-to-value ratio. |
| 2. | However, use of the standard Section 184 Program loan-to-value ratio (see Paragraph 5.16) is available for borrowers related by blood (e.g., parent-child, siblings, aunts-uncles/nieces-nephews), or for unrelated individuals who can document evidence of a family-type, longstanding and substantial relationship not arising out of the loan transaction. The occupying borrower must sign the security instrument and mortgage note. |
While HUD does not object to legitimate transactions where the non-occupant borrower assists in the financing of the property, such as when parents help their children buy their first home or assist a child who is a college student to purchase a house near campus (one unit properties only), this arrangement may not be used by non-occupant borrowers to develop a portfolio of rental properties. The degree of financial contribution by the non-occupant borrower, and the number of properties similarly owned, may indicate that an investor loan has become the practical reality and that, in effect, family members are acting as "strawbuyers."
| 3. | The Department has not imposed additional underwriting criteria on such transactions (such as specific qualifying ratios the occupying borrower must meet individually). Lenders must judge each transaction on its merits and should consult with HUD for guidance if necessary. |
| c. | Three- and Four-Unit Properties |
| 1. | The projected rental income from all units must be equal to or greater than the monthly mortgage payment. |
| 2. | Net rental income is the appraiser’s estimate of fair market rent from all units (including the unit chosen by the borrower for occupancy) less the allowance for vacancies and maintenance set by the local HUD office. |
| 3. | The monthly payment is defined as principal, interest, taxes, and insurance (PITI), as well as any homeowners’ association dues, computed at the note rate (no consideration for buydowns may be given). |
| 4. | The above calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on income, credit, cash to close, and the projected rents received from the remaining units. |
| 5. | The borrower must have a reserve of three months’ mortgage payments (PITI) after closing. |
| d. | Building on Own Land or Acting as the General Contractor. A homebuyer can use equity, which they have created in the past (e.g. built the foundation or the on-site infrastructure), if the appraisal supports its value. |
| 1. | If the borrower is acting as a general contractor or is having a house built on land already owned or being acquired separately, the standard Section 184 Program loan-to-value ratio (see Paragraph 5.16) may be used if the borrower receives no cash from the settlement. The lender must condition its approval to ensure cash is not received at closing. |
| 2. | The appropriate loan-to-value limit (97.75 or 98.75 percent) is applied to the lesser of: |
| § | The documented acquisition cost of the property, which includes: |
| § | The builder’s price, or the sum of all subcontractors’ expenses, such as bids and materials. |
| § | The cost of the land (where applicable). If the land has been owned for more than six months or was received as an acceptable gift, the value of the land may be used instead of its cost. |
| § | The allowable closing costs. |
Where applicable, equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrower’s entire cash investment. However, the borrower may not receive more than minimal cash at closing ($250 or less). Thus, the mortgage may never exceed the total acquisition cost of the property. (Replenishment of the borrower’s own cash expended during construction is not considered as "cash back," provided the borrower can provide cancelled checks and paid receipts for all out-of-pocket funds used during construction.)
