TL;DR
Most failures are documentation failures under deadline pressure, not relationship failures.
What this FAQ answers
Borrowers often ask whether family purchases are allowed. The better question is whether your file proves price integrity, funds flow, and repayment sustainability clearly enough for underwriting.
This page merges rules and execution guidance so you can treat a related-party purchase with the same rigor as any third-party deal.
What is a non-arm's-length transaction?
Income Tax Act section 251 treats related persons as non-arm's-length. CRA guidance also notes unrelated parties can be non-arm's-length in fact depending on control, common mind, or acting in concert.
In mortgage practice, this affects how lenders evaluate valuation support, funds trail, and transaction integrity.
Arm's-length vs non-arm's-length: practical underwriting differences
| Transaction type | Typical context | Main lender concern | Borrower focus |
|---|---|---|---|
| Arm's-length purchase | Independent buyer and seller with separate interests | Standard valuation and affordability review | Complete documents and realistic affordability |
| Non-arm's-length family sale | Purchase between related parties | Price support, source-of-funds clarity, and transaction integrity | Transparent disclosures and clean paper trail |
| Non-arm's-length in fact | Unrelated parties with interdependence or common control | Economic substance and independence of terms | Evidence of bona fide market structure |
Three transaction paths to compare
| Path | When it fits | Main risk to manage |
|---|---|---|
| Market-style family purchase | Clear terms, independent valuation evidence, complete paper trail | Assuming informal family agreements are enough for underwriting |
| Hybrid family transfer + third-party financing | Need flexibility while preserving lender clarity | Complex funds flow without matching support documents |
| Delay and prepare | Evidence package is incomplete or timeline is unrealistic | Forcing commitment before documentation is lender-ready |
48-hour pre-commitment checklist
- Reconcile relationship disclosure and purchase terms across all file documents.
- Validate down-payment and transfer trail with full statement pages.
- Confirm affordability and stress-test assumptions before final lender commitment.
- Check appraisal and value-support assumptions against contract terms.
- Run a final underwriting-readiness review before waiving financing conditions.
Psychology traps that create late-stage failures
| Mental model | Common trap | Pragmatic correction |
|---|---|---|
| Normalcy bias | Assuming family trust reduces lender-documentation needs | Treat the file as a formal market transaction from day one |
| Present bias | Prioritizing quick commitment over complete evidence | Delay commitment until pre-approval and proof package are complete |
| Anchoring | Fixating on an agreed family price without independent support | Validate valuation assumptions before final financing decisions |
| Overconfidence bias | Believing lender exceptions will fill documentation gaps | Assume standard underwriting proof burden and prepare accordingly |
Sources
Best next step
- Run the pre-approval guide before signing a family purchase agreement.
- Use the mortgage documents checklist for complete lender-ready evidence.
- Run affordability and payment calculators with conservative assumptions.
- Start your pre-approval plan after the 48-hour checklist is complete.
