7 Steps for Buying a House From Your Parents
Buying a house from your parents is similar to a traditional home sale, but mixing family and finances comes with a few extra hurdles to navigate. These seven steps can help keep bad feelings at bay and ensure that you and everyone else in your family are treated fairly.
Step #1: Negotiate a price
When buying a house from a stranger, negotiating is impersonal and often communicated through realtors. With family, though, negotiating becomes an entirely new beast. What’s “fair” can be subjective — a child might hope or expect to buy the home at a “below-market” price from their parents. The parents, on the other hand, may look at the home’s profit as a retirement nest egg and assume their kid will pay full market price.
The best way to find a middle ground is to research the home’s actual market value. You can then use that number as a starting point for negotiations. Here’s where to start:
→ Request a comparative market analysis (CMA). A real estate agent can access local databases of sold homes to give you an idea of how much your parent’s home would be worth if it was sold to a stranger.
→ Try online valuation tools. An online home value estimator gives you a general idea of home sales, although the data may not be as precise as a CMA.
→ Get a home appraisal. A home appraisal is a written report prepared by a licensed real estate appraiser. The appraisal provides an unbiased opinion of your home’s value by comparing its features to other sold homes in your area.
Having the home value information doesn’t eliminate any awkward interactions, but it can help ground each side’s proposed price point. Once you’ve reviewed the value information, try to arrive at a verbal price agreement. Keep in mind: Real estate agreements aren’t binding unless they’re in writing, so nothing would be final at this point.
Do you still need a home inspection?
It’s always a good idea to get a home inspection on any house purchase. It gives you a detailed look at all the working parts of the house from the foundation to the rooftop. If your parents are elderly or disabled, they may not have kept up on repairs and maintenance. You can use the report to negotiate the price based on current and future repairs.
Step #2: Decide if you need professional advice
Families often choose to sell or buy from each other to avoid the cost of real estate commissions, attorney fees or other home selling costs. But that also means you’re on your own when it comes to understanding the legal implications if things go wrong. If you’ve never purchased a home before, you may want to consider contacting a real estate attorney and tax professional before signing a contract. A professional may also be able to help if you and your parents haven’t been able to settle on a fair price for the home.
There may also be tax consequences for buying your parent’s house, especially if they’re gifting you equity or money for a down payment. Consult a tax expert for guidance to avoid any unpleasant tax bills down the road.
The importance of getting a title report
Learn more about how a title company helps you find your title history.
Step #3: Sign a contract to buy your parent’s home
Once you’ve settled on a tentative price, it’s time to draft a purchase contract. The terms of the contract will be legally binding once you’ve signed and dated them.
In general, the purchase agreement should include:
The price of the home and a detailed description of the address and legal boundaries
The names of the buyers and sellers
Who will pay what closing costs
Anything that will stay or go with the property (such as personal property, fixtures and built-in shelves)
The closing date
If you hire a real estate agent to help with the sale, they’ll help write up the purchase agreement. They are licensed and trained to follow the real estate laws of your state and can help you navigate the details of the contract.
Learn more about how to buy a house without a real estate agent.
If you’re selling your home to a family member without a realtor, find an experienced real estate escrow officer or attorney to help prepare “escrow instructions.” If you or your parents have taken out a mortgage recently, contact the escrow officer or attorney that helped to see if they’d be willing to prepare the agreement.
The importance of opening escrow when you buy from or sell to a family member
Step #4: Document any gifts of equity
A parent may choose to gift a portion of the home’s equity toward their child’s down payment. No cash actually changes hands — the parents simply choose a dollar amount of the equity to give them as part of their down payment.
Lenders set rules for gifts of equity based on the type of mortgage. As an example, conventional loans and FHA loans both allow gifts of equity, but the guidelines are different.
Conventional Fannie Mae and Freddie Mac gift of equity rules
Fannie Mae and Freddie Mac set the rules for conventional mortgages, which are the most popular home loans available. The gift of equity guidelines for Fannie Mae are more flexible than Freddie Mac’s, and a side-by-side look will help you choose which is the best fit for your scenario.
| Fannie Mae gift of equity requirements | Freddie Mac gift of equity requirements |
|---|---|
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FHA gift of equity rules
In general, loans backed by the Federal Housing Agency (FHA) are more flexible than conventional loans. However, gift of equity requirements for an FHA loan come with some extra conditions:
If you’re receiving a gift of equity for a 3.5% minimum down payment, you must prove one of the following:
- The home was your parent’s primary residence
- You were renting the home as your primary residence and can prove it with copy of the lease and proof of six month’s worth of rent payments
If you can’t meet the above requirements, then:
- You’ll need a 15% gift of equity
- You have to provide a gift letter
Read more about how to complete a gift letter for a down payment.
Step #5: Apply for a mortgage
If you don’t have the cash to buy your parent’s home, you’ll need to apply for a home loan. Let your lender know upfront that you’re buying from a relative.
A purchase between family members is considered a “non-arm’s length” transaction, which simply means the buyer and seller are related. However, lenders will scrutinize these types of purchases for signs of elder abuse and mortgage fraud schemes.
Step #6: Consider a seller carryback if you can’t get a mortgage
If you don’t qualify for or are denied a mortgage, your parents might be willing to consider something called a “seller carryback.” With this arrangement, your parents maintain the mortgage on the property, but they’ll set an interest rate and establish a payment schedule.
A note is usually recorded and a lien is placed on the home that must be paid off if you decide to sell. You make payments to your parents for a set time and can refinance and pay off the balance once your finances are in order.
Learn more about how to refinance a mortgage.
Step #7: Close on the sale
To finalize the sale, you’ll need to schedule a closing. It can be at a bank or title company, or with an attorney. Review the closing documents and confirm that all the terms are correct and you’re each paying the closing costs and price you agreed to. If you’re taking out a mortgage, you’ll receive a closing disclosure three business days before the closing to review before signing the paperwork.
Read more about typical mortgage closing costs.
Pros and cons of buying a house from family
| Pros | Cons |
|---|---|
You may not need a down payment. | You could harm your family relationship if they think they were treated unfairly. |
You won’t have competition from other buyers. | Your parents could be taxed if they gift your down payment. |
Your parents can act as your lender if you can’t qualify for a mortgage. | You could inherit property or title problems if you don’t do your homework. |
Frequently asked questions
Yes, as long as you and your parents understand how it works. It removes the need for the exchange of any cash — the seller won’t need to provide money for gift funds and the buyer won’t need to document the transfer of cash to their account.
If you’re gifting a large chunk of equity to your child, consult a tax specialist to determine if any gift taxes are payable.
Yes. Your parents can choose a sales price, but may have to contend with potential tax consequences since the IRS could treat the difference as a gift.
An estate attorney would be the best person to help answer that question. There are a number of factors to consider, including whether the property is your parents’ primary residence, how long your parents live after the sale and whether they sell it below market value.
Yes, but you should discuss potential tax consequences with an estate specialist first.
No, unless they have an assumable mortgage.