Buying a property from a family member, a business partner, your own landlord, or an entity you already hold an interest in is not automatically disqualifying — but which program you are in decides nearly everything about how hard it will be. On our commercial (SBC) program, a non-arm's-length transaction is generally ineligible, and a disclosed exception is the only path forward. On our 1-4 unit DSCR program, the guideline does the opposite: it names a specific list of non-arm's-length structures as eligible, then fences them with a few hard rules.
That split is the point of this page. Below: what makes a transaction non-arm's-length in the first place, why underwriting gets heavier when the parties are related, exactly where the two programs diverge, and what documentation makes one of these work where it is permitted.
What makes a transaction non-arm's-length
Both programs define it by relationship, not by price. The relationship does not have to be family, and it does not have to be with the seller.
Our commercial guideline describes a non-arm's-length transaction as one in which a personal or business relationship exists between the Borrower and the seller, builder, broker, appraiser, title company, closing agent, closing attorney, employee, or other interested party.
The DSCR guideline uses nearly identical language: a non-arm's-length transaction exists whenever there is a personal or business relationship with any parties to the transaction, which may include the seller, builder, real estate agent, appraiser, lender, title company or other interested party.
The seller is only the first name on those lists. If your brother-in-law is the listing agent, if the title company is owned by your partner, if you are buying through an entity that shares a member with the selling entity — the transaction is non-arm's-length even when the price is fully at market and everyone is acting honestly.
The two programs, side by side
This is the contrast in one view. Every row traces to text in the current guidelines.
| Commercial (SBC 8/3/2026) | DSCR 1-4 unit (V28) | |
|---|---|---|
| Baseline treatment | Generally ineligible for financing | A named list of non-arm's-length transactions is eligible |
| Path to approval | Exception may be considered if disclosed at initial application | No exception needed for the listed structures; manual underwrite required |
| Late discovery | Relationships discovered later in the process will likely result in a decline | Not addressed as a separate rule |
| If approved | May carry significant added restrictions on LTV, documentation, and appraisal review | Standard program terms, subject to the fences below |
| Buying from your landlord | Not called out separately; falls under the general rule | Expressly eligible, with cancelled checks or bank statements to verify pay history |
| Family sale or transfer | Not called out separately; falls under the general rule | Expressly eligible, subject to gift fund requirements |
| Gift of equity | Not addressed | Not permitted |
| Borrower or relative acting as the agent | Not called out separately | Expressly eligible (either side) |
The honest summary: the DSCR program has decided in advance which related-party structures it will accept and written them down. The commercial program has not — it holds the line at "generally ineligible" and pushes each case into an exception review.
Why lenders look harder at these
Two reasons, and they are worth understanding because they tell you what to bring.
The value evidence is weaker. In an arm's-length sale the contract price is itself a data point: two unrelated parties, each looking after their own interests, agreed on a number. When the parties are related, the price proves much less and the appraisal has to carry more weight — so the appraisal gets reviewed harder. On the commercial side a Real Estate Analyst who is a State Certified General Real Estate Appraiser performs a desk review of the report; where the analyst's conclusion differs, the analyst's opinion sets the internal value, though never higher than the appraised value. Maximum LTV is then calculated on the lower of the internal value from appraisal review, the adjusted sales price net of material credits, or the appraised value.
Concessions can hide. A related seller has reasons to make a deal work that a stranger does not — rebating money after closing, throwing in equipment, forgiving rent. Each moves real value, and none of it shows up in the price unless someone insists. Both guidelines attack that problem, in different ways, below.
The commercial side: disclosed, or declined
Three things in that paragraph do real work.
"Generally ineligible" is a starting position. An exception may be considered. The guideline does not say it will be granted, does not name a maximum LTV for these cases, and does not describe a process. Anyone who tells you what LTV a related-party commercial purchase gets is guessing.
"Disclosed at initial application" is a deadline. Not before closing, not when asked — at initial application.
"Discovered later will likely result in a decline." This is the sentence that costs money. Disclose up front and the worst realistic outcome is an early decline, before you have paid for appraisal, title or environmental work. If it surfaces in title review or in the appraiser's comments, you have spent that money and are likely getting declined anyway.
The commercial guideline also does not carve out a softer path for business relationships as opposed to family ones. A purchase from a company you co-own with the seller sits in the same paragraph as a purchase from your father.
The DSCR side: an eligible list, and three fences
The DSCR guideline names these non-arm's-length transactions as eligible:
- Family sales or transfers (subject to the gift fund requirements)
- Assignment of contracts
- Property seller acting as their own real estate agent
- A relative of the property seller acting as the seller's real estate agent
- Borrower or guarantor acting as their own real estate agent
- A relative of the borrower or guarantor acting as the borrower's real estate agent
- Borrower or guarantor purchasing from their landlord — cancelled checks or bank statements are required to verify satisfactory pay history between the borrower and the landlord
That last one is the most useful line in either document for a tenant who wants to buy what they rent: the requirement is specific and satisfiable. Produce the payment record.
Now the fences.
Fence one: gift of equity is not permitted. The DSCR asset table lists Gift of Equity as Not Permitted, flatly. That matters because a gift of equity is the most common way a family sale gets structured — seller sells below market, and the discount becomes the buyer's down payment. That structure does not work here. Gift funds are a different thing, permitted with restrictions (below).
Fence two: property flips. Within the property flip provisions, the DSCR guideline states that non-arm's-length transactions are not permitted, that the lender is responsible for reviewing the chain of title, and that particular due diligence should be exercised in cases of entity-to-entity transfers to ensure no red flags are present. The same provisions require that the property have been marketed openly and fairly — through a multiple listing service, auction, a documented for-sale-by-owner offering, or developer marketing — unless the property seller is a bank that received the property through foreclosure or deed-in-lieu.
So the eligible list and the flip provisions pull in opposite directions, and a transaction meeting the flip definition is where they collide. Read literally, a related-party purchase that also trips the flip test lands in the harder category — and an open-marketing requirement is hard to satisfy in a sale that was never marketed.
A transaction is a flip if either test is met:
If your price exceeds the seller's own acquisition price by more than 10% and the seller acquired the property 90 or fewer days before your agreement, it is a flip; between 91 and 180 days the threshold is more than 20%. When a transaction is a flip, a second appraisal must be obtained and a copy provided to the borrower, dated before the note date, and the seller on the purchase contract must be the owner of record.
Fence three: nobody related can live there. All DSCR loans must be for business purposes only and certified as such, and no property can be occupied by any borrower or guarantor. The lease requirements go further: an Eligible Tenant is any party other than a borrower or guarantor, an affiliate, an officer, director, executive employee or manager of the borrowing entity, and any family member — spouse, siblings, ancestors, lineal descendants — of any of those. No borrower or guarantor, or their immediate family members, may be a lessee.
So "buying the house your sister rents to you" fails on occupancy long before anyone reaches the non-arm's-length question. "Buying a rented duplex from your sister and keeping the existing unrelated tenants" is the transaction the eligible list is describing.
Where the money actually moves: concessions and credits
This is the part borrowers underestimate. Both programs cap what an interested party can contribute at 3%, but they enforce it differently, and the DSCR enforcement is sharper.
| Commercial (SBC 8/3/2026) | DSCR 1-4 unit (V28) | |
|---|---|---|
| Contribution cap | Seller may contribute a maximum of 3% toward closing costs | Interested party contributions limited to 3% of the purchase price |
| Permitted use | Closing costs | Closing costs and prepaid expenses only; not down payment, not reserves |
| Over the cap | Amounts above 3%, or for any purpose other than closing costs, reduce the sales price | Treated as a seller concession |
| Effect on LTV | LTV based on the lower of adjusted sales price, internal value estimate, or appraised value | Both the appraised value and the sales price must be reduced by the concession amount for LTV, CLTV and HCLTV |
| Disclosure | Contributions are reviewed as part of the transaction | All seller concessions must be addressed in the sales contract, appraisal and HUD-1/CD |
| Personal property | Valuation considers real estate only, with no consideration given to business goodwill, inventory or FF&E | Any personal property transferred with the sale must be deemed to have zero transfer value; if value is assigned, sales price and appraised value are both reduced by it |
The DSCR rule is the harsher of the two: reducing the appraised value as well as the price means a concession cannot be offset by a strong appraisal. On both programs, rent credits, sweat equity, and seller, developer or broker credits of any kind — including advanced rent payments for a seller lease-back — are ineligible assets.
Gift funds: permitted, but bounded
Both programs allow up to 50% of the required down payment and closing costs to come from gift funds from an acceptable donor, evidenced by a signed letter stating the gift amount and transfer date, a statement that no repayment is expected, and the donor's name, address, telephone number and relationship to the Borrower. Both require verification that the funds are in the donor's account or have already been transferred. On both, gift funds cannot be used to meet post-closing liquidity or P&I reserve requirements.
Both restrict the donor identically: the donor may not be, or have any affiliation with, the builder, developer, real estate agent, or any other party with an interest in the transaction. On a related-party purchase that bites — if your uncle is both the donor and connected to the sale, the gift is not usable.
Both define a close relative by a closed list: mother, father, sister, brother, wife, husband, civil partner, daughter, son, grandparent, grandchild, parent-in-law, son-in-law, daughter-in-law, sister-in-law, brother-in-law, stepparent, stepchild, stepsister, stepbrother, foster child, legal guardian. Both state the list does not include extended family such as uncles, aunts, cousins, or nieces and nephews, and gifts from anyone else are not permitted.
What documentation makes one work
Where a related-party transaction is permitted, the file has to replace what an open-market negotiation would normally supply.
The relationship, disclosed at application. Written, specific, naming every related party and their role. On the commercial program this is the difference between an exception review and a decline.
Independent value. On the commercial program, appraisals must be ordered through an Appraisal Management Company; appraisals ordered by the broker or borrower directly are not acceptable, and reports prepared for the Borrower's benefit are not accepted. There is no version of a related-party deal where a valuation you commissioned yourself does the job.
Payment history, if you are buying from your landlord. Cancelled checks or bank statements verifying satisfactory pay history — named explicitly on the DSCR side, and the cleanest evidence available in that structure.
A clean settlement statement. Every contribution, credit and item of personal property on the face of the contract, the appraisal and the HUD-1 or CD. Nothing settled outside.
Sourced funds. On the commercial program, down payment and closing cost funds must be documented with the two most recent months of bank statements or a Verification of Deposit, and newly opened accounts or unusually large deposits must be explained and documented. A large deposit from the family you are buying from will be asked about.
Chain of title that survives review. The DSCR guideline puts chain-of-title review on the lender and flags entity-to-entity transfers for particular scrutiny.
Transactions that look similar but are governed elsewhere
Several structures get lumped in with "buying from someone you know" and are actually governed by their own provisions.
No Consideration Transfers. A conveyance of ownership without an exchange of monetary value or adequate consideration — intra-family transfers, divorce, inheritance, estate planning, gifts, conveyances to trusts or business entities. On the commercial program these must all be reviewed regardless of timeline; credit and background reports may be required for all prior vested owners, and LTV or cash-out proceeds may be reduced. Note the distinction: a no-consideration transfer has no price, as opposed to a purchase at a friendly price.
Inherited property. Its own provision — rate-and-term refinance eligible, cash-out by exception with possible LTV restrictions, probate cleared and title vested in the Borrower's name; paying off another party's documented equity interest may be considered. If that is your situation, [refinancing an inherited commercial property](/blog/refinancing-an-inherited-commercial-property) covers it properly.
Lease options. Where you are buying under a written option, the commercial program reviews the deal as a purchase transaction, and rent credits may be considered as evidence of injection with the lease agreement and cancelled checks — a different mechanism from the DSCR landlord-purchase rule, set out in [buying a commercial property on a lease option](/blog/buying-a-commercial-property-on-a-lease-option).
Land contracts. The commercial program allows land contracts and will consider them as a refinance transaction unless the contract occurred within the last 12 months. On the DSCR program, rent-to-own and contracts for deed are ineligible.
Related-party leases on commercial property. A property leased to a related entity majority owned or controlled by the Borrower is classified as Owner Occupied, not Investor. Appraisers may classify a property as owner occupied based on use, control and economic benefit — particularly where ownership is shared among related parties, the property is operated by a family business, or no arm's-length lease exists. Investor classification requires that at least 50% of effective gross income come from arm's-length, third-party tenants, or that the property be one of the named types. If a borrower-affiliated business occupies 25% or more of the rentable square footage or contributes 25% or more of the rental income, a business profit and loss statement and business bank statements may be required.
That catches people. Buying a building from a relative and leasing it back to a company you control does not produce an investor loan on the commercial side — it produces an owner-occupied classification and a different documentation set.
What this page does not do
This describes how two program guidelines treat related-party transactions. It is not an approval, not a quote, and not a commitment to lend.
It does not tell you what LTV a related-party transaction will receive. The commercial guideline says an approved exception may carry significant added restrictions on LTV, documentation and appraisal review — it does not quantify them, and neither will we. Nor does it tell you whether your exception will be granted; "may be considered" is the guideline's language, preserved exactly.
It does not cover pricing, rate, term, prepayment structure, loan amounts, DSCR floors, credit thresholds, reserve calculations, entity eligibility, or property type eligibility. Those are separate provisions with their own requirements.
It does not address the legal or tax consequences of buying from a related party — basis, gift tax, estate treatment, entity formalities, or the enforceability of any agreement between you and the seller. Those belong with your attorney and your accountant, not with a lender.
And it does not tell you how to structure around the non-arm's-length rules. The disclosure obligation is the rule. If a relationship exists, the file is better with it stated on day one.
Guideline SBC 08/03/2026 · Reviewed August 31, 2026
Published August 31, 2026 · Updated August 31, 2026
How to use this guide
This article is educational guidance, not an offer or commitment to lend. Rules, property facts, credit, leverage, documentation, and full underwriting still control any actual scenario.