Mortgage Myth Busters: Do you know what is a non-arms length transaction?

Do you know what is a non-arms length transaction?

Do you know what a non-arms length transaction is?


What is a non-arms length transaction?

When it comes to real estate transactions, most are actually arms length transactions.  An arms length transaction in real estate is when you have both a seller and buyer who have no relationship to each other and who act independently of each other. Because of this kind of relationship, it’s safe to assume that this transaction will be fair and equitable to all parties involved.

non-arms length transaction in a real estate transaction would be between family members or relatives in which there could be some sort of conflict of interest.  Meaning that a transaction between a father and son could yield a different result. It could result in a lower sales price than what the market demands. Or that one of the parties involved would be giving back a more than normal concession to help purchase the new home, such as seller concessions.


Why can a non-arms length transaction hurt a real estate transaction?

Lenders have different guidelines when it comes to a non-arms length transaction purchase. One great example is that if you have a home that has gone into foreclosure and your father will buy it to help you keep from losing your home, this is not allowed what so ever. It’s not only considered a non-arms length transaction, but there is major interest in the reason for the purchase. The family member is basically bailing out another family member and lenders fret against this.

A non-arms length transaction can fall under ‘identity of interest'. FHA defines this as a sales transaction between parties with family relationships or business relationships. There can be other types of financing restrictions that fall under identity of interest. The main restriction would be the maximum LTV allowed(loan-to-value). Your down payment could be affected if you fall into this situation. I will be going over these types of restrictions in a post tomorrow.


Conclusion : Non-arms length transactions need to be understood and disclosed properly. When regarding a purchase transaction, if the realtor or loan officer doesn’t ask the question upfront, the buyer or seller should be disclosing any type of family relationship to all parties involved. When this kind of information comes up during the process, it could delay or kill the real estate transaction.





follow Jeff Belonger on Twitter


The FHA Expert's fan page on Facebook     Add Jeff Belonger to your network @ LinkedIN

                                                                            FOLLOW ME ON FACEBOOK



- FHA Loans - USDA Loans - VA Loans -

- Energy Efficient Mortgages - 

- Conventional Loans - 203 k loans -

- FHA Home Loans - Mortgages -


Experience & Knowledge at its BEST !!!



Follow me on:

Mortgage Myth Busters



For more information on FHA loans, please go to this link. The FHA Expert

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!



For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors


Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

Comment balloon 18 commentsJeff Belonger • February 24 2011 08:12AM


Nice blog, I see lots of agents selling short sales to family members nowadays. I'm glad it's not me involved in any of those transactions. 

Posted by Jeremy De La Garza, Corpus Christi, TX (Corpus Christi Realty Group) almost 10 years ago

The arms length addendum is almost always a part of a short sale package these  Cousin Suzy can't buy the house and sell/rent it back to the seller....

Posted by Sally K. & David L. Hanson, WI Real Estate Agents - Luxury - Divorce (EXP Realty 414-525-0563) almost 10 years ago

"transaction will be fair and equitable to all parties involved."

Mmmmmm.   Seems to me that arms length transactions have to be acceptable to both parties. 

Many times transactions that are accepted are neither fair or equitable.

However, if the parties are independant and acting in their own self interest, it may not be fair or equitible but still "arms length".

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley,, MD & VA Homes and Real Estate) almost 10 years ago

The problem is even if they are related but have different last names, they are signing the paperwork anyway without a worry that someone might find out.

Posted by Stella Barbour, Principal Broker, Serving Virginia and Maryland (NoVa Brokers LLC) almost 10 years ago

Well, what the heck -- I liked it enough to lean on the button!

Posted by Tish Lloyd, Broker - Wilmington NC and Surrounding Beaches (BlueCoast Realty Corporation) almost 10 years ago


JEREMY... . you do see lots of agents doing this? Who is doing the loans? Because underwriters do check the names on the agreement of sale and on the title, and match everything up. So if they have the same last names, this will this should be flagged or caught. thanks and thanks for the compliment.

SALLY & DAVID>.. I don't sell real estate, so I wouldn't make that statement in my post. But I do know it has to be disclosed and that even FHA has a form to be signed...

LENN... . I agree with your last statement... "Many times transactions that are accepted are neither fair or equitable."  I was just stating what is defined by an arms length transaction. This is what is perceived to be true amongst lenders.. but we know that deals are made and are they fair? Maybe to one party... good point.

STELLA... . very good point that I didn't bring up. I should put that in there as a disclosure of clarity... but we all know that some people have not disclosed this in the past, hoping that people don't catch it or find out. Thanks for pointing this out.

TISH... lol.. well, step on it hard. lol Time will tell, but no biggie. But thanks for the suggest.


Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Hi Jeff-

The first short sale I ever listed was a woman who wanted her brother to purchase the condo so she could rent it from him. When I tried to explain it to her, the brother called me (he was a mortgage officer) and told me I was crazy. I even repeatedly informed them both this is not going to work.

The buyers agent was also involved and could not understand what I was saying...

Thank you for your excellent post.


Posted by Dave Sulvetta, Realtor (Dave Sulvetta, ReMax Connection, Gloucester County Realtor) almost 10 years ago

Good morning Jeff,

I agree that we must disclose this and also "explain" what an arms length transaction is. 

Posted by Don Rogers, Realtor, Broker, CDPE, GRI, OnullFallon MO & St Charles County MO homes (Keller Williams Realty Chesterfield) almost 10 years ago get the Suggest Button on this one brother.  There's nothing wrong with Non-Arm's Length transactions at all.  But they do need to be disclosed.  Becuase there's always more that goes on than just the simple contract, it seems.  I understand the higher scrutiny.  I deal with this all the time.  Needless to say, it needs to be played right otherwise the repercussions could be severe.  Great post!

Posted by Larry Bettag, Vice-President of National Production (Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001) almost 10 years ago

Jeff - I agree with Larry-gold star baby!  Great educational information from you, as always.

Posted by Nevin Williams, Senior Mortgage Advisor (Fairway Independent Mortgage Corporation) almost 10 years ago


DAVE... . it's kind of funny even when the loan officer argues with you. It's one thing to know you are right.. but if just 1% unsure, go check with your underwriter and or search the information. But wait.. not really funny, but sad.. Anyhoo.. thanks for the kind words and for the compliment.

DON... . some times the problem is from bad advice of a realtor, loan officer, or even a family member.. saying, if they don't know, it won't hurt. But once found out, it can kill a deal on the spot. As I mentioned to someone above, I picked up a deal because of this.. and we just cashed out of the parents house so they could buy their sons house for him, as it went into foreclosure. thanks

LARRY.. . well, define nothing wrong.. lol  Meaning, in some cases, depending on the scenario, the borrower might need 15% down. I will be writing about this tomorrow. But in any case, it does need to be disclosed to all parties. Especially to the loan officer so we can advise them correctly. And thanks for the kind words and for the compliment of suggesting this.

NEVIN... . thanks for stopping by and for that polite compliment..


Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Jeff: If mom and dad sell house to son and daughter in law, then transaction can only be a 75% LTV per FHA guidelines.

I suggested to FHA we drop the son off the loan since he has no income, then 96.5% would be okay since this solves identity of interest problem (now selling only to daughter in law)

Then FHA rejected the loan again because parents wanted to go on as non owner co-applicants with daughter in law (ruling from our FHA lenders was that they would only accept non owner co-applicant who was a son or daughter)

Do you see a way to do this loan that I may have overlooked (other than getting another co-signer?)

Thank you for being an the FHA genius and letting me pick your brain. Great post!



Posted by Janet Guilbault, San Francisco Bay Area Direct Mortgage Lender (Platinum Home Mortgage Company) almost 10 years ago

If you have time, give me a call. I may have misunderstood some things. Our short sale trainings (1 certification, 1 CE and lots of seminars) left me believing the "no, not ever, don't think about it". I'm putting in a BofA short sale today and I'll check in equator, but I'm pretty sure there is a box you click to agree to no non-arms length transactions. Yet some of your commenters above say "OK!".

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) almost 10 years ago


Thanks for sharing your thoughts on a non-arms length transaction.

Good luck and success.

Lou Ludwig

Posted by Lou Ludwig, Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC (Ludwig & Associates) almost 10 years ago


JANET... .  you stated this... "If mom and dad sell house to son and daughter in law, then transaction can only be a 75% LTV per FHA guidelines."

From what I know and looked into, that is not true. If it was the parents primary residence, then the son could buy it with as little as 3.5% down. If it was an investment property, the son must put 15% down. If the parents are going to be co-signors, aka non-occupant co-borrowers after selling the property to their son... from what I know, this can't be done at all. Now, I could be wrong, but where are you coming up with the 75% LTV?  And for which scenario?

You then stated this...  "Then FHA rejected the loan again because parents wanted to go on as non owner co-applicants with daughter in law (ruling from our FHA lenders was that they would only accept non owner co-applicant who was a son or daughter)"

You lost me on the last sentence, when you said...  "only accept a non owner co-applicant who was a son or a daughter."   Are you saying that they will accept a non-owner co-borrower if they were a son or daughter, but not if they were a mom or dad?  because the guideline is that you can have a family member, doesn't matter if mom, dad, son, sister... to be on the loan if the family is buying a property that is a primary house... but if it's a house that the family currently owns and is selling to their son, sister, or if it's the son selling it to his parents... this can't be allowed. Does this make sense now?  But regarding the 25% down part.. I am not sure where that came from.  thanks


LESLIE... . hope I was able to help. But your part about Jeremy in comment # 1.. all he is saying is that he sees people do this... but he didn't say if any of these closed. I highly doubt it. the only two ways that i can see is hist statement working is A. if the underwriting doesn't catch the same last names on the agreement of sale and the title report.. or.. B. if it was a family member or relative with a last different name and on paper, you couldn't tell with the paper trail.

LOU... . my pleasure and thanks.. you to.


Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago


Disclosure is the key, isn't it?! Aren't there scenarios with lenders when you CANNOT do an non-arms length transaction?


Posted by Jeff Dowler, CRS, The Southern California Relocation Dude (eXp Realty of California, Inc.) almost 10 years ago

Good morning, Jeff. Nice, easy-to-understand explanation of arms length transactions. (Or should I say, non-arms length transactions.)

Posted by Bill Burchard, Broker, Realtor, Representing Buyers and Sellers (3B Realty: 951-347-3818, CA) almost 10 years ago

Good information Jeff. I have come across a couple of these deals lately and the family member just cannot understand why dad cannot buy the son's home that is going into forclosure.

Posted by Roy Paeth, Just a regular guy helping real people! (Keller Williams Inspire) almost 10 years ago