We enjoy working with people we know. Family, friends and professionals with whom we have an existing relationship serve as a source of comfort when it comes to financial transactions. Although you may have the best intentions, buying a home from someone you know could impact your ability to utilize your VA loan and work with VA lenders!
Attempting to purchase a home with a family member or friend would be considered a “non-arm’s length real estate transaction,” which is not supported by the VA. Therefore, before you agree to buy your best friend’s house with your VA loan, it’s a good idea to brush up on the rules surrounding non-arm’s length real estate transactions.
What is a Non-Arm’s Length Real Estate Transaction?
Also known as a “related party transaction,” these types of transactions involve family or friends conducting real estate-related business. While it may seem clear-cut from the definition, non-arm’s length real estate transactions can involve a lot of gray areas when it comes to who you can and cannot work with.
It doesn’t always have to be a military member wanting to purchase a home from a friend. In fact, a non-arm’s length transaction can also mean the buyers or sellers have some type of relationship with a third party who receives some sort of compensation when the deal closes.
Can I Use My VA Loan in a Related Party Transaction?
If you are wondering if you may be stepping into a related party transaction, take a step back and think about the relationships involved in the situation. Typically, if your existing relationship with a professional can influence the final price of the home, then that would be considered a non-arm’s length real estate transaction.
An obvious example may be a father selling his home to his son. However, less apparent examples could be existing relationships with any of the following involved professionals:
- Seller/Buyer
- Builder/Developer
- VA Lender
- Real Estate Agent
- Appraiser
- Settlement Agent
With that information, we can see that there are a variety of non-arm’s length real estate situations that could arise. Such transactions come with a variety of ethical concerns, as they can potentially drive up the price of the home and influence important transaction-related decisions.
For example, a mother serving as the real estate agent selling her daughter a home and even an uncle officially appraising his niece’s home are both prime examples that could be considered a “conflict of interest.” The VA does not support transactions that involve related parties (friends, family, etc.) conducting business with one another.
All buyers, sellers and certain third-party experts need to have a professional relationship that cannot be affected by any current or previous connections. There are ways to finance a property when such an event occurs. However, the rates and terms in these situations are less ideal than in unrelated real estate transactions, and there are also fewer loan choices.
Consult Your VA Lender
With the point of the VA loan being to provide military members with favorable lending options, entering into a related party transaction defeats its purpose. Before you hop into a non-arm’s length real estate transaction, consult your VA lender about the potential implications.
You can also gain more knowledge about your VA benefit and the VA lending process by reviewing our AHRN resources.
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?