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Buying a house from your parents: Pros and cons

Erik J. Martin
The Mortgage Reports contributor

What to know before buying a house from your parent(s)

You’re looking to buy a home. Or your parents are eager to sell theirs. Maybe both things are true.

In any event, buying a house from your parents can be a smart strategy.

The home buying process is often simpler and less expensive with loved ones involved.

The tricky part? This is a business transaction that involves significant funds. And money matters involving family members can be difficult to navigate.

Here’s what to consider when buying a house from your parents.

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Can I buy my parents house from them?

You can absolutely buy your parents’ house form them. There are no laws that say it’s illegal to sell your house to a family member, or vice-versa.

David Carey is vice president of residential lending for Tompkins Mahopac Bank. He says there is no legal or regulatory restriction that prevents a child from purchasing a parent’s home in any state.

Plus, “there are numerous benefits to buying a home from a parent,” he says.

“First, you are in a unique position to have first-hand knowledge of the improvements, upkeep, and maintenance completed on the home.”

Second, you get to move into a home you’re familiar with — one associated hopefully with many positive memories.

And your mom and dad know the home they’ve loved for so long will remain in the family. In addition, they’ll get to revisit that home and take comfort in knowing you’re enjoying it.

Buying a house from your parents can help you save money

There’s another big benefit to buying your parents’ home: Both parties can save a lot of money.

Your parents may agree to sell to you at a more reasonable price and waive any contingencies.

In addition, both parties can agree not to use a real estate agent, which can save thousands on commission costs. And closing costs will likely be lower.

Buying your parents house can help you save on closing costs — but don’t skip important ones like the title insurance, home inspection, or appraisal.

But, that said, don’t skip on important parts of the home buying process just because you can.

“It’s still strongly recommended –—and could be required by the lender — to get title insurance, a home inspection, survey, and appraisal,” Carey notes.

“But many of these requirements can be completed much more efficiently because you are coordinating them with a family member, and not through a disconnected third-party.”

Buying your parents’ house for less than market value

Parents and children might have more room for price negotiation than strangers do. “Often, for instance, a parent sells the property below market value and gifts a portion of the equity back to their child,” says Carey.

With a “gift of equity,” your parents can give a portion of their equity earned in the home that you can use toward your down payment.

This can help you meet the down payment minimum required by your lender.

Often, that down payment requirement is 20% of the purchase price if you want to avoid paying mortgage insurance.

Note: “If the sales price is too low, this will be considered a gift by the IRS that must be taxed” –Jonathan Alpart, Fathom Realty

Receiving a gift of equity eliminates the need for you to come up with the down payment funds in cash. And most lenders consider an equity gift the same thing as a cash gift.

Just note that, if your parents lower their price too much to accommodate you, it could raise red flags.

“If the sales price is too low, this will be considered a gift by the IRS that must be taxed,” says Jonathan Alpart with Fathom Realty.

The IRS currently allows a tax-free equity gift of $15,000 a year ($30,000 for married couples).

How to finance a home you’re buying from your parents

You can purchase your parents’ home with cash or financing. The latter involves shopping and applying for a mortgage loan. You’ll need to qualify based on your income, credit, and other factors.

Find out if you qualify for a home loan today (Oct 28th, 2020)

Or, if your parents’ mortgage is assumable, you may be able to pay a flat fee and assume the existing mortgage and its debt.

Most FHA, VA, and government loans are assumable. But you’ll still need to qualify for the mortgage.

If their mortgage loan is not assumable, you can contact the lender and request if the mortgage can be transferred to you.

And if that doesn’t work, you’ll have to take out a new mortgage on the property.

Special mortgage treatment for parent-child transactions

Note that buying a home from your mom and dad isn’t a traditional “arm’s length” transaction. That means the lenders involved will take a closer look. They’ll want to ensure that no party is being manipulated and no rules are skirted.

“Remember — this is a huge financial undertaking. I would recommend getting the advice of a property attorney. It’s never a good idea for money to change hands unless certain guarantees are in place,” says Carey.

For example, an elderly parent could pass away in the middle of the transaction.

“That’s why a deed vesting you, the child, should be prepared and filed the same day any funds are transferred to pay off the mortgage. Plus, a lawyer will know how to handle these and other matters,” Carey explains.

Connect with a lender to discuss your options (Oct 28th, 2020)

Possible challenges involved with buying a parent’s house

There are a lot of benefits to buying a house from your parents. But that’s not to say that a real estate transaction between you and your parents will definitely go smoothly.

For instance, it may be harder to renovate the house knowing that your modifications will undo designs or custom features your parents enjoyed.

“Also, your parent could have seller’s remorse. They may believe post-sale that they could have gotten much more for the house on the open market,” Carey points out.

“Inevitably, a mechanical system repair, appliance replacement, or significant maintenance item will materialize after the sale.

“You don’t want to end up with your parents feeling guilty or you feeling resentment. Have a contingency or back up plan for unexpected or emergency repairs.”

Therefore, prepare for the unexpected.

“Maybe your parents will feel entitled to drop in on you all the time since they used to live there. Or they will give you lots of unwanted advice about how to take care of the home, decorate, etcetera,” says Alpart.

Most of this comes down to setting clear expectations about the sale and treating it as the official transaction it is.

Tips for parent-child communication about a home sale

Amy Miller, a professional family mediator, agrees that conducting business like this with a family member is delicate.

“The transfer of a parent’s home can be perceived as a source of financial exploitation,” she cautions.

“That’s why this possibility should be discussed proactively as a family to prevent lawsuits, issues with tax avoidance, probate concerns, and family discord.”

Miller recommends working with a mediator to manage this conversation and identify solutions.

“Good communication is the key to a successful property transfer in which both sides are satisfied,” she adds.

For these and other reasons, it may be a good idea to work with a real estate agent.

“I always recommend that a real estate professional be involved to handle the paperwork and transaction, says Leslie Shull, assistant professor of real estate at Sacramento City College.

“This person can ensure that everything is done correctly. They can step in in case something goes awry with the transaction.”

The first step: Get approved for financing

If you’re not buying your parents’ house with cash, and their current mortgage is not assumable, you’ll need a new mortgage loan to finance your purchase.

The first step? Get pre-qualified by a lender to make sure you can afford the asking price on your parents’ house.

If so, you can move forward with the. sale. If not, you’ll either have to re-negotiate the terms or save up a little longer.

You can start your pre-approval application right here. Getting pre-qualified does not commit you to the lender or loan.

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