NON-ARMS LENGTH INCOME CHANGES
When diving into the realm of mortgage transactions, you might come across the term non-arms length mortgage transaction. But what exactly does it mean? Quite simply, a non-arms length mortgage transaction occurs when the buyer and the seller have a personal or business relationship. Here’s a closer look at the implications, examples, and considerations of non-arms length mortgage transactions.
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Understanding Non-Arms Length Transactions
In a typical mortgage transaction — deemed an arms-length transaction — the buyer and seller act independently without any relationship influencing the terms of the sale. This ensures a fair market value for the property. A non-arms length transaction, on the other hand, involves parties that have a familial, personal, or business connection, such as between family members or close friends.
Common Scenarios
There are various situations where a non-arms length transaction could occur, including:
- Purchasing a property from a family member or relative.
- Buying a property from an employer.
- Selling a property to a business associate or partner.
Implications for Mortgage Approval
When it comes to non-arms length transactions, mortgage lenders take a closer look. There’s an increased risk that the sale price might not reflect the true market value, which could impact the loan amount and terms. Lenders may require additional documentation and may impose stricter conditions to ensure the transaction is legitimate and financially sound.
One key requirement might include an independent property appraisal to verify the fair market value. Additionally, lenders might restrict loans to primary residences only, excluding investment properties in non-arms length transactions.
Considerations and Precautions
If you’re involved in a non-arms length mortgage transaction, here are important considerations to keep in mind:
- Transparency: Disclose all details of the relationship between buyer and seller to the lender to avoid complications.
- Professional Advice: Consult with real estate professionals and legal advisors to navigate the complexities of the transaction smoothly.
- Fair Market Value: Ensure that an independent appraisal is conducted to establish the true market value of the property.
Understanding the nuances of non-arms length mortgage transactions can help in making informed decisions, ensuring compliance with lender requirements, and achieving a successful property transfer.
NON-ARMS LENGTH INCOME CHANGES
Effective for new loan applications dated on or after Monday September 16th Freddie Mac made changes to its non-arm’s length employment guides and it is good. Fannie is not making the change at this time.
Currently Fannie Mae requires the last two years tax returns if you are employed by a family member or interested party to the transaction.
Freddie in case you didn’t know only requires 1 year which has been a benefit currently.
Freddie Mac is now allowing for an IRS Wage and Income transcript for the most recent year in lieu of the most recent tax return.
This is a big deal especially when you do not want the rest of the tax return to be put in underwriting.
Here is the deal though. The documentation we receive must validate the previous years earnings and compare it to the current earnings. If the current income is not supported then we will need to use the validated income from the previous year.
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