We enjoy working with people we know – family, friends and professionals with whom we have an existing relationship. But when it comes to your VA Loan, buying a home from someone you know could impact your ability to utilize VA lenders!
When something of value is given in order to receive something else in value, the deal is considered either an “arm’s length transaction” or it’s not.
What is a Non-arm’s Length Real Estate Transaction?
A non-arm’s length transaction is one where the buyers and the sellers have some sort of family relationship or a third party has a business relationship that will be compensated if the deal closes. This relationship could influence the final price of the home, either by giving the buyer a price that is well below market or misrepresenting the terms of the loan. The VA considers parties that cannot conduct business with one another if there is a relative involved or a personal relationship with a third party such as a:
- Builder/Developer
- Seller
- Lender
- Real Estate Agent
- Appraiser
- Settlement Agent
If any of these parties has some sort of special relationship that does not appear to be independent of one another, it could fall under this consideration. The obvious might be a father selling to his son. Such a transaction will be heavily scrutinized as it relates to value and any compensation to third parties paid after the deal has closed. Other examples are a mortgage company employee buying a home from his boss, or a listing agent is selling a home for her daughter.
Any special or direct relationship between the buyers, sellers and certain third parties need to have a relationship that could not be affected by any current or previous relationship. There are ways to finance a property when such an event occurs but the rates and terms are less favorable and there are fewer loan choices.
Get more answers to your VA Loan questions from our VA Loan Resource Center!
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We want to know:
Have you ever bought a home from someone you already had a relationship with?
My husband and I are both veterans and we were hoping to be able to purchase my grandparents’ home as our first house. The home is paid off, and it was built by my late grandfather, so there is a strong desire to keep it in the family. My grandparents are getting old and having trouble with the stairs, so they need to move to a more accommodating home sooner rather than later. The house is appraised at $150,000, but there is little chance we would be able to afford anything more than $100,000. They really want to sell it to us, and we would love to buy it. Will I really have to let it leave the family because of our veteran status? Are there other ways around this?
Hi Elena- The key phrase re: the VA is “might not be your best choice.” In your situation however, that doesn’t mean you can’t use your earned VA benefit to buy your grandparent’s home. I believe that by documenting your situation (grandparent’s home, moving into a care facility, qualifying status, etc) your lender can make the case to approve your application. There can also be a situation called a “gift of equity” which as the name implies means your grandparents complete a form that states whatever equity there is in the property (based upon the appraised value and final purchase price) is a gift to you. VA guidelines accept such a gift but as such the gift could be considered taxable above and beyond allowable gifting limits as defined by the IRS.
It’s a VA lender’s call, but I don’t think you’ll have a problem in your situation. Non-arm’s length transactions receive more scrutiny but your situation will weather any review. Go for it, but talk to a VA lender first.
Hi! We were pre approved for a VA loan, but we were not able to purchase the home we wanted due to my husband’s ETS date. (He doesn’t have a job lined up yet, but he has applied at several places”) my parents purchased the home in cash and will sell it to us once we have the hire on letter or the 30 day pay stubs for my husband’s new job. Will it be an issue for is to purchase from them in 30-60 days?