Your Guide: Buying A House From Your Parents

If you’re interested in buying a home and your parents are selling, you might have a great homeownership opportunity – especially if you’re a first-time home buyer. It’s likely you already know the home well, and you might be able to get a good deal.

But there are some Internal Revenue Service (IRS) regulations and lender requirements you might need to know about if you’re thinking of buying your parents’ house. That’s particularly true if you pay below the market price. Let’s dig into the facts about this type of real estate transaction, from pros and cons to legal implications.

Can I Buy My Parents’ House?

Home buyers can legally purchase a home from their parents or any family member. There are no laws or regulations about who someone can sell their home to. If your parents are looking to sell and you’re looking to buy, it can be a great option.

There are a few great reasons to buy your parents’ home. For example:

1. You may have a sentimental attachment to the home and want to keep it in the family. If your parents are ready to leave a house, it can make a lot of sense for a child to move in.

2. You have a good understanding of the home’s history. If it’s your childhood home, you’ll be familiar with – or be able to uncover  – any major problems, repairs or upgrades that have occurred. Hopefully, your parents will be transparent about any past or current issues.

3. You may be able to get a good price on the home. Of course, this depends entirely on the circumstances of the sale, but you’ll likely avoid a bidding war. Determining a fair price can still be a huge stumbling block, though, and have lending and tax implications.

What To Consider When Buying Your Parents’ House

Knowing the home and the sellers doesn’t mean the process will be simple or straightforward. You’ll still need to keep a few considerations – which we’ll discuss in the following sections – in mind.

Your Timeline

It’s crucial to set expectations and establish a timeline when buying a house from your parents.  If you’re just starting to discuss buying their home, it’s important to be clear and honest about your timelines on both sides of the transaction.

For the sale to work out, you may need to be ready to move in at the same time your parents are ready to move out. Then again, a flexible timeline may be one of the perks of buying your parents’ home.

How You’ll Handle The Transaction

Even if you don’t have to list the home and hold showings, working with a real estate professional can still have value. A real estate agent or real estate attorney can help oversee the real estate transaction. These professionals can guide you through the process and be sure that you check all the boxes so the transaction is valid and legal.

Financing Options

You’ll also need to weigh out your financing options. You may have the option of applying for a new mortgage or assuming your parents’ mortgage. Mortgage lenders may have stricter requirements and guidelines for home loans involving family members, so be sure to share all the details with them as soon as possible in the loan-seeking process.

The Details Of Non-Arm’s Length Transactions

A non-arm’s length transaction is a transaction between two people with a prior relationship outside of the transaction. This could include family members, colleagues or friends.

The IRS keeps an eye on non-arm’s length transactions because there’s a history of mortgage fraud there. Sometimes, people sell a home to relatives at a large discount in an attempt to avoid capital gains taxes.

Because of this extra IRS oversight, many lenders have stricter requirements for mortgage loans on non-arm’s length transactions. For example, you may have to make a larger down payment or pay extra due diligence. Your lender should be able to explain the process as it will apply to you.

How To Handle A Gift Of Equity

A gift of equity is when someone sells a home to a family member for below market value. That’s because the IRS sees this as a form of tax avoidance.

The seller may have to pay a gift tax if the gift of equity exceeds $15,000. It’s important to consider this tax when settling on a price for the home.

A borrower using Freddie Mac, Fannie Mae or an FHA loan must use the home as their primary residence or second home.

Legal And Tax Implications

If you’re buying your parents’ house below market value, there could be legal and tax implications. Working with a tax attorney or real estate attorney will help you better understand whether your transaction will qualify for gift taxes or capital gains taxes. If you’re not trying to buy the house for a big discount, it’s usually easiest to choose a purchase price close to fair market value.

Where Your Parents Will Go

Of course, it’s important to have a plan for your parents. If they don’t already have another home to move into, you may have to help them figure out what’s next.

Consider discussing options such as a life estate, renting back to your parents or buying a second home. Your parents could be moving into a retirement community or looking to use the proceeds from the house sale to buy a new home in a new location. This is a common practice among people who wish to downsize.

How To Buy A House From Your Parents In 6 Steps

Here’s a breakdown of how to buy a house from your parents in a half dozen steps.

1. Get Preapproved For A Mortgage

It’s essential to first figure out your financing and get preapproved. To avoid any surprises down the road, be upfront in giving your lender all the details of the home purchase, including your relationship with the sellers and the price you’re hoping to pay. Before deciding how to move forward, compare the amount you’re approved for to the fair market value of the home.

2. Negotiate A Price Based On Comps And An Appraisal

It’s also very important to determine the market value of the home and negotiate the sale price with your parents. You should review real estate comps and order a home appraisal, even when buying a house from a family member.

This step in the process is when talking with a REALTOR^® or another real estate professional can be helpful. Professionals can usually help you determine a fair and reasonable value of the property. Just because the transaction is between family members doesn’t mean the parents want to take a loss or fail to pocket the value of the home.

3. Document Everything

Be sure to properly document everything – including the purchase agreement – throughout the buying process. Good communication and thorough record keeping are important steps when buying a house, even from your parents.

4. Perform A Title Search

Don’t skip out on completing a title search, even if your parents are the only ones who’ve owned the home. Your mortgage might require a title search, but it’s always good to double check and have the full picture of the transaction.

5. Get An Inspection

It’s important to get a home inspection even though you’re buying your parents’ house. Even if you don’t plan on asking for anything to be repaired, you’ll want to be fully aware of any problems or issues with the home so you know what you’re getting into. Your parents may not have told you about everything that’s ever happened with the house, or they may have made some questionable repairs.

6. Close And Get The Keys

When buying a house from your parents, the closing should be pretty similar to the closing with any other property transaction. You’ll get final approval from your lender for your mortgage, and both parties will have to sign a lot of paperwork. On closing day, you’ll need to provide all the funds necessary to purchase the home.

Pros And Cons Of Buying A Home From Your Parents

Here are the advantages and disadvantages of buying a home from your parents.

FAQs About Buying Your Parents’ House

Now, let’s discover the answers to a few questions often asked about buying a home from parents.

Can I buy my parents’ house from them?

Yes, it’s legally permissible to buy your parents’ house, and the purchase comes with some potential benefits. However, buying the home below market value – also known as a gift of equity – can create some tax and mortgage loan complications.

How does buying a house from your parents work?

Buying your parents’ house can work like a typical real estate transaction, especially if both parties agree for real estate professionals, a mortgage lender, a home inspector and a home appraiser to be involved. The transaction becomes more complicated if your parents sell the home to you at below market value.

Can I buy a house from my parents at below market value?

It’s possible to buy your parents’ home at below market value, but it may burden your parents with gift taxes.

The Bottom Line

Buying a home from your parents can be a great opportunity, whether you take over their existing mortgage or use a gift of equity as a down payment. Be sure you’re aware of the value and condition of the home and cover your bases with a real estate attorney or another professional. If you’re looking for financing, you can go ahead and start the application online today and see what you can afford.