Non Arms Length Transaction Home Loan Help

by Levi from New York

Ask Kate for non arm's length transaction home loan help: Hi Kate, My father in law has a house in upstate New York. He's selling for 70k and owes me 20k. He'll sell me the house for 50k. He said he'll sell me the house (on paper) for $100. Then I can take a $50,000 line of credit on the house and pay him that and save on mortgage fees. Or should I take a mortgage and lock in the low interest rates available today? Thanks.


Kate Answers: Non Arm's Length Transaction Home Loan Help

***zz-portrait-left.shtml*** Dear Levi,

This proposed real estate transaction between your dad and you is called a non arm's length transaction in mortgage lending.

How can a non arm's length transaction be identified?

What's a Non Arm's Length Transaction in Real Estate?

Non Arms Length Transaction Home Loan Help
  • Are both the home buyer and the seller acting in their individual best interests?

  • Are both the home buyer and the seller acting independent of each other?

  • Are the home buyer and the seller related to one another?
If you answered no, no, and yes, you're in a non arm's length transaction, causing some mortgage lenders to race away in panic.

Will Lenders Accept a Non Arm's Length Transaction?

Lender's hesitancy to get involved with a non arm's length transaction has been around for many years. But don't assume I'm saying it will stop you from getting a mortgage. In fact, let me tell you a story.

A single mom was turned down by one of the largest mortgage companies in the US and sent to me when I was in lending. She wanted to buy a house from her ex-boyfriend, the father of her child. He offered her a deal much like yours. In return, she would waive all claims for child support.

I am not an attorney so I did not argue the validity of their agreement. I had bigger worries about getting her a mortgage. Long story short, I helped a first time home buyer become a homeowner without a penny from her pocket.

Example of Successful Non Arm's Length Transaction

But wasn't this a non arm's length transaction? Of course! You will be interested to see how she successfully obtained her mortgage loan approval.
  1. They spelled out their intertwined relationship to the lender.

  2. She financed as a home buyer instead of refinancing as a non-seasoned homeowner.

  3. They priced the home on the lower end of fair market value.

  4. She agreed to an FHA mortgage loan although this program was not her first choice.

  5. He gifted the downpayment and paid mortgage closing costs from his equity.

Why do I tell you this? Because there is usually more than one way to accomplish goals.

So talk with a local bank and compare their response to a major lender. You could ask which would better serve your needs and your father's, mortgage refinancing or a purchase transaction. And don't forget to consult with a tax accountant.

Home Equity Loan Line of Credit vs 30 or 15 Year Fixed Rate Mortgage

Now let's get back to your original question about loan types. Should you finance with a traditional fixed rate mortgage or opt for a home equity loan line of credit (LOC)?

There are tradeoffs with both. Your decision will be somewhat dependent on whether or not the lender will agree to a cash-out refinance using an LOC since your ownership of the home will not be seasoned.

The line of credit is free of many customary closing costs but usually carries adjustable rates. Watch for annual and life-time caps on the interest rate, not just the payment. Read the fine print on prepayment penalty. Ask if there is a balloon payment due.

Some homeowners like being able to use the line of credit, pay it back and re-use it vs the amortization of a traditional mortgage. Yet a 30 year fixed rate mortgage remains the king of the jungle among homeowners. However, the 15 year term is catching up in popularity.

Mortgage closing costs should be similar but interest rates for 15 year fixed will be significantly lower than its 30 year counterpart, saving you thousands over the term of the loan. See how Tucker saved money with a 15 year fixed rate mortgage here.

Ask Kate's Home Loan Help

Levi, additional home loan help for non arm's length transactions and mortgage financing for rural properties can be found at these Ask Kate questions and answers: Good luck and best wishes,


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Comments for Non Arms Length Transaction Home Loan Help.

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Arms Length Transaction with Gift Equity
by: Susan L. from Bolton Landing, NY 12814

House is on the market for 250 days. List price $170,000, reduced from $200,000.

Grandson will purchase house for $178,000 with a gift equity from Gramma of $29,000 and $4400 in closing costs/pre-paids.

Is this still considered arms length as it was listed and sales/listing price are within 5 percent?

Hi Susan, Kate here...

Because the home buyer is a relative of the seller, most lenders will consider this a non-arm's length real estate transaction. However, since the price is not unreasonably low, it may still be do-able, depending on the type of mortgage program, the appraised value, and other qualifying criteria.

You will learn more about securing loan approval for non-arm's length real estate transactions at the following Ask Kate letters (and don't miss the comments)...

Refinancing Non-Arms-Length Non-Seasoned Home Purchase
Buying A House From Family.

Best wishes, Kate

Gifting Equity in My Townhouse to My Daughter
by: Donna I. from Tonganoxie, KS

I have a clear title to my townhouse. I want to sell my house to my daughter and I want to gift her equity as the down payment. How and where can I do this?

Hi Donna, Kate here.

This is called a non-length's arm mortgage transaction. I recommend first reading the question earlier on this page from Levi who, along with his father, was in a similar situation as you and your daughter.

You'll also want to read Refinancing Non-Arms-Length Non-Seasoned Home Purchase Transaction question from Getting Worried where you'll get more help. Don't miss the comment section at the bottom of the page for the happy ending!

Best wishes and please let me know the outcome.


Buying My Mom's House
by: Susan from Kalispell, MT

My Mom's name is on the deed but her brother's name is on the loan. He did that to help her because he has very good credit.

She paid $210000.00 and the loan is down to $93000.00. I need a loan for $93000.00. The loan is through Wells Fargo and it is not assumable.

I am a first time buyer. The problem is I have no money for closing costs and neither does my Mom. Just wondering what would be the best thing for me to do.

Hi Susan, Kate here...

What if your mom sold you her house at a reasonable market price plus your cost of getting a mortgage! Then as the seller, your mom could offer to pay your closing costs and perhaps even gift you the downpayment out of her equity.

Under some circumstances, it's might be possible to do this with little to no money coming out of either of your pockets!

You can get more details here on this page (scroll up) where I answered Levi who was planning to buy his father's house!

Best wishes, Kate

P.S. It will be very important to have a lender who understands this type of FHA financing and a real estate agent who knows how to write up the purchase and sale agreement between your mom and you.

P.P.S. You will also want to see how Getting Worried was successful getting loan approval on her non-arms-length mortgage transaction after I answered her Ask Kate question at Refinancing a Non-Arms-Length Non-Seasoned Home Purchase.

Click here to add your own comment.

You can also ask Kate about your mortgage at Ask Kate About Buying a House.

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