![]() The IRS takes serious measures to ensure that home sales are made at fair market value. You’re the employee of a property developer, and you’re purchasing one of the developer’s homes as your primary residence.You’re purchasing a property you’ve been renting at least 6 months before the sale.You’re purchasing the primary residence of a relative, fiancé(e) or domestic partner.The home will be your primary residence.According to the FHA’s rules on identity-of-interest transactions, you must make at least a 15% down payment for a non-arm’s length transaction unless you qualify under one of these exceptions: In an arm’s length transaction, you can pay 3.5% down on an FHA loan. Let’s say you want to buy a house in a non-arm’s length transaction using a Federal Housing Administration (FHA) loan. ![]() This can be true for conventional mortgage lenders, but is especially common when applying for a government-backed mortgage, which comes with a higher degree of lender scrutiny. As a result, the lender may increase some of the financial requirements for the mortgage, like a higher down payment. For example, your lender might assume, given your established relationship with the seller, that you aren’t paying fair market value for the property. You’ll have to jump through a few more hoops for a non-arm’s length transaction. Restrictions are stricter for non-arm’s length transactions Let’s take a look at other important considerations you’ll need to keep in mind. To ensure buyers and sellers are acting in their own self-interest and are protected from any potential influence from the other party, lenders apply added restrictions to safeguard all parties involved, including the lender. There are important considerations to keep in mind, including the potential stress this kind of transaction could put on the relationship. Selling your home to a family member, or buying one from a friend, can mutually benefit the both of you – but it ain’t always easy. What Should I Know Before Pursuing a Non-Arm’s Length Transaction? Lenders may impose stricter guidelines or costlier terms on non-arm’s length transactions than they would with arm’s length transactions. When buyers and sellers act independently and in their best interests, transactions are less susceptible to mortgage or tax fraud, and the home sale price is more likely to reflect fair market value. Lenders, such as banks, credit unions or online lenders, must follow stricter guidelines when underwriting loans for non-arm’s length transactions because of the heightened risk of fraud associated with these real estate transactions. On the other hand, people or businesses involved in arm’s length transactions are unrelated and behave independently. There are even preexisting relationships between organizations or businesses. In a non-arm’s length transaction, the buyer and seller can be relatives, friends, married or soon-to-be married. But, if you buy your shiny, new Benz from the local car dealership, no matter how friendly the dealer was, that’s an arm’s length transaction. If your parents sell you their old beater car, that’s a non-arm’s length transaction. In an arm’s length transaction, there is no preexisting relationship between the buyer and the seller. In a non-arm’s length transaction, there is a preexisting relationship between the buyer and the seller. Non-arm’s length transactions can benefit both sellers and buyers, but they also come with increased scrutiny, restrictions and requirements to prevent either party from taking advantage of the other or avoiding obligations like property taxes. Non-arm’s length transactions and arm’s length transactions are real estate terms used to describe the relationship between the buyer and seller – and each comes with stipulations. And that first couple that stood at least an arm’s length away from each other? If one was buying a house from the other, that would be an arm’s length transaction. 2 were friends, family members or business partners and one of them was buying a house from the other, that would be a non-arm’s length transaction. ![]() It might be safe to assume they know each other well – very well. They are standing close to each other, maybe even arm in arm. It might be safe to imagine they don’t know each other very well. Let’s imagine two people standing apart from each other, at least arm’s length apart. ![]()
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