Ask an RU: Everything you Need to Know about Non-Arm’s Length Transactions

Referrals and networking are key tactics that many of us rely on to generate business in the mortgage industry. These strategies are used to help build one’s sales pipeline. But how do you proceed at the underwriting stage when your borrower profile involves a non-arm’s length transaction?

Our very own Natalie Stokes, one of our helpful Regional Underwriters, covers all the details about non-arm’s length transactions and how you can best handle them.

Defining non-arm’s length transactions

This type of transaction exists due to a direct relationship between a seller and a buyer. Think of relationships like family members, close friends, employers, employees, or other parties with a business affiliation between the seller and the buyer. Additionally, these other parties could also include, but are not limited to, the builder/developer, broker, appraiser or closing agent.

When you come across these transactions, it’s important to remember that they may not yield a fair or accurate market value. And as such, these party members, due to their closeness/relationship, may not be as objective as those engaging in an arm’s length transaction may be. The majority of purchases in this industry typically fall under arm’s length transactions, or when two independent parties agree to the selling and purchasing of a property at fair market value.

Yet, there are guidelines around how to proceed when you come across a non-arm’s length transaction and certain loan types do allow these transactions.

What types of loans are allowed to be non-arm’s length transactions?

You can help meet your borrower’s needs if they are engaging in a non-arm’s length transaction. Just make sure that you’re following the right guidelines, especially when entering the underwriting phase of the mortgage process. Non-arm’s length transactions are permitted for the purchase of existing properties for all occupancy types. That includes primary residences, second homes, investment properties and newly constructed primary residences.

When you’re working on these types of loans, you need to mindful of GSE expectations and possible limitations, too. For Freddie Mac, mortgages secured by a property acquired in a non-arm’s length transaction are ineligible for Desktop Appraisal and Appraisal Waiver. This may impact your process and the length of time it may take to reach close for your borrower. But for Fannie Mae, there are other requirements that need to be met in order to make these transactions viable options for borrowers. To learn more about these guidelines and requirements, refer to both of the GSE websites: Fannie Mae and Freddie Mac.

What about the types of loans that aren’t allowed?

Some loan types involving non-arm’s length transactions may not be allowed… but staying in the know can help you confidently and quickly navigate these scenarios with your borrowers.

Non-arm’s length transactions are not permitted for loans with delayed financing. This type of financing means that a borrower pays with cash or sometimes with stocks/financial assets. Then once they’re settled in their home, they set up a mortgage.  Additionally, mortgage loans on newly constructed homes secured by a second home or investment property if the borrower has a relationship or business affiliation with the builder, developer, or seller of the property are also not permitted.

If you run into these restrictions and have any questions about how to handle these loan types, feel free to contact our Regional Underwriting Team or contact your Sales Representative today!

How can I navigate the appraisal review for this transaction type?

Often, we find that proactively providing all information up front is the best approach. It helps the appraisal process go much smoother than if information, like having a non-arm’s length transaction, is not disclosed to the parties reviewing a borrower’s loan until much later or not at all. In the case of a non-arm’s length transaction, the best thing you can do to help your borrower is to disclose the relationship of the property sales between the two parties, buyer and seller, on the appraisal. Once disclosed, the appraisal should be carefully reviewed to ensure that accurate market value of the property has been established.

You’re in the mortgage industry, you’ve likely already heard this before… The more detailed and up front you are to all parties involved in the mortgage process, the better the experience will be for you and your borrowers. That’s just good business and saves you time in the long run. Plus, we know how important it is to stay knowledgeable and current on all of the guidelines and expectations set for the mortgage process – your borrowers will thank you for your expertise and the quick turn times!

More ways we can help

Your Enact MI team has got you covered. Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

Source:  Natalie Stokes is a Regional Underwriter for Enact.

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