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How to Buy a House From a Family Member

January 21, 2021 · 5 minute read

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How to Buy a House From a Family Member

Sometimes home, sweet home is right under our noses. Buying a house from a family member may be the perfect solution, but everyone should be aware of how to negotiate and seal the deal.

A house hunter may have their heart set on buying a house from their parents because of the memories it holds. Another might see the appeal in buying Grandma and Grandpa’s home so they can retire in Florida. Others may have a relative who wants to give them a good deal.

Whatever the circumstances, the transaction is a bit different than one between strangers, so let’s break down some important things to know about how to buy a house from a family member.

Proceed With Caution

Before diving into the details of buying a house from a family member, it’s important to consider how crafting the deal can affect familial relationships.

Most likely neither party will hire a real estate agent, which might lead to keeping negotiations and planning all in the … family. So it’s a good idea to have regular check-ins to ensure that both parties feel good about the next steps and are ready to move forward.

It can be helpful to take notes about the arrangement after meeting and making a copy for everyone involved so that all important details are in writing and available for review. That way everyone is clear on what is expected of them.

No one wants to argue with family members over money or property, so listening well, compromising, and double-checking that everyone is fully on board are good ways to have a harmonious handoff.

Determine the Purchase Price

When it comes time to finalize a price for a home someone is purchasing from a family member, this step can be a bit trickier than when buying a home from a stranger.

It’s important to make sure that no one feels taken advantage of.

To determine the purchase price, it’s a good idea to first decide on the fair market value—what the property would sell for on the open market. This can be done by reviewing the local real estate market or hiring an appraiser.

You can look at comparable sales, or comps, with public property records, on Zillow by using the “Recently Sold” filter, on Realtor.com under “Just Sold,” and on Trulia under “Sold.”

Once both parties have an idea of the home value, they can decide how much the buyer will pay. In some cases, this will be the fair market value. In other scenarios, a family member may offer to sell the house at a lower cost, pay closing costs, or offer a cash gift.

Draw Up the Purchase Agreement

Now that both parties have settled the details of the real estate arrangement and are ready to move forward, it’s time to draw up a purchase agreement. The agreement will outline price and payment terms.

Buyers who need a home loan can take the contract to their lender when applying for a mortgage.

Prepare to Jump Through Hoops

There are two main types of real estate transactions: arm’s length and non-arm’s length.

An arm’s length transaction is more common: The parties involved in a sale and purchase do not have a relationship and are acting in their own self-interest.

When someone buys a home from a family member, it’s a non-arm’s length transaction. This can apply to friends and co-workers as well.

Non-arm’s length transactions may be subject to more scrutiny because the chance of fraud increases when both sides have a relationship, and because one party could manipulate the other in some way.

The arm’s length principle of transfer pricing comes into play. That means the sale price of the home must equate to what it would be between strangers.

In short, there are more government and lender guidelines to follow when trying to get a mortgage.

Know How the Gift of Equity Works

One thing the seller may want to consider is giving their relative a gift of equity, or selling for less than full market value.

A gift of equity can result when one party (say a parent) wants to give the buyer (like a child) a substantial discount.

A gift of equity comes with tax implications worth considering. There is no immediate tax impact, but the basis of the property can affect future transactions. To determine the basis, choose the greater of the following two:

1. How much the buyer paid for the property.
2. What the seller’s adjusted basis of the property was at the time of sale.

Depending on the amount of the basis of the property, a gift tax may apply.

Gifts of equity aren’t taxable for the recipient. Sellers are allowed to give $15,000 per person each year without having to file a gift return.

Here’s another plus for buyers: Many lenders allow the gift to count as a down payment.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Bring in the Professionals

Even though buying a house from family is a personal affair, it can be helpful to bring in some professionals to make sure the process goes smoothly, everything is done legally, and both parties walk away feeling satisfied and respected.

It can be a good idea to hire a title company that can protect the buyer from any liens or to ensure that no one else has a claim on the home. Even with a high level of trust between family members, this can be a savvy step to take to protect the buyer.

A lawyer can help make sure all contracts are done properly.

And it can be helpful to consult a tax professional in order to be aware of any tax implications of the agreement.

Know How to Finance Home, Sweet Home

When buying a home from a family member, many buyers will still need to take out a home loan. Even with a discount or a special offer from a family member, it can be hard to purchase a home outright.

Those who need a home loan can consider taking the following steps to make sure they find the right loan for them.

Step 1. Understand What a Mortgage Is

A mortgage is a loan that can be obtained from a mortgage company, a commercial bank, or another financial institution. This type of loan allows consumers to purchase a home or other types of real estate.

Typically, lenders only provide mortgages to borrowers who meet select standards such as having a certain income and credit score. Basically, they want to ensure that the borrower can pay back the loan.

The home the loan is for acts as collateral, and if the borrower does not repay the money borrowed (including interest), the lender may foreclose on the property.

Step 2. Prepare for the Mortgage Process

Before applying for a mortgage, getting organized is an important part of the process. Prospective borrowers should know their credit score and how much they can afford to pay each month for mortgage payments.

Step 3. Research Loan Options

When applying for a home loan it can be beneficial to speak with multiple lenders to see what rates and terms may be available. Weighing interest rates (fixed vs. adjustable and rate), types of loan programs (conventional, FHA, or VA), and length of the loan (generally 15 or 30 years) can help the borrower make a more informed decision.

Prequalifying for a loan gives you an estimate of what you might be able to borrow, based on information you provide about your finances and a “soft” credit inquiry.

Pre-approval is based on a deeper look at your creditworthiness. If you’re pre-approved, you’ll receive a pre-approval letter, which is an offer (but not a commitment) to lend you a specific amount.

Online lenders are also an option for taking out a mortgage. SoFi mortgage loans come with no hidden fees or prepayment penalties, and borrowers can put as little as 10% down.

The Takeaway

How to buy a house from a family member? Look at comps, realize the beauty of the gift of equity, know that the transaction may face extra scrutiny, and consider calling in some professionals.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


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