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HUD Tightens Guidelines on Related Party Transactions

Mortgagee letter updates definition

March 1, 2012

By staff

Federal Housing Administration loans used to finance home purchases between related parties require reduced loan-to-value ratios. An update to this policy expands the definition of related parties.

The revision impacts what is known as identity-of-interest transactions. The transactions involve a sale between parties with family or business relationships.

Parties who fall into this category include a child, parent or guardian as well as a spouse. Legally adopted children and foster children are also among those who are identified in guidelines already in place.

As of March 2011, the maximum loan-to-value ratio on identity-of-interest transaction was limited to 85 percent with some exceptions.

In Mortgagee Letter 2012-3 dated Tuesday, HUD added brothers and sisters as well as stepbrothers and stepsisters.

Uncles and aunts were also added.

The bulletin omitted children, parents and grandparents from the new guidance; however, a HUD spokesman clarified in a statement to Mortgage Daily that the omission was a mistake, and the mortgagee letter will be revised.

Another change outlined in the bulletin was the requirement for a profit-and-loss statement from self-employed borrowers if more than one calendar quarter has elapsed since the last filed tax returns.

The updates outlined in the mortgagee letter impact loans with cases assigned on or after April 1.

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