Sometimes it makes sense for real estate to be kept in the family. If you're wondering whether you should buy a house from your parents, you're in luck. We've outlined everything you need to know about this unique type of real estate transaction, from how to handle the financial aspects of closing the deal to what you need to consider when thinking about how this could impact your relationship.
How to determine whether you should buy a house from your parents
Do you want to buy your parents' house?
When you're thinking of buying your parents' house, the first thing you want to consider is whether you actually want their real estate. Sometimes buyers, especially first-time homebuyers, find that they do want to purchase a home from their parents because it's familiar. They know the property's location as well as its quirks and selling points.
On the other side of the spectrum, sometimes buyers will decide that they would rather have a fresh start, particularly a house that is their very own and is not caught up in family ties. They may find that they would rather be involved in a traditional arm's-length transaction, where the buyer and seller are strangers to one another.
Are your parents ready to move?
The next factor to consider is whether your parents are ready to make a move. Often homeowners can be attached to their property, especially if it has been their primary residence for some time.
If, for example, your parents are sick of paying their mortgage and property taxes, you may be doing them a favor by offering to take the property off their hands. However, if they were planning on aging in place, asking to buy their home may be putting pressure on them to make a decision that they aren't ready to make.
However, sometimes there is a happy medium. Occasionally children will buy the house that they grew up in as an investment property and rent it back to their parents. Then, when the parents are no longer capable of living in the home, the children keep the property as part of their portfolio.
Is your relationship in a good place?
The last factor to consider is whether your relationship with your parents is in a good enough place to handle being involved in an important financial transaction together. You may come at this venture with separate goals. For instance, the child may be looking to get a deal on the property while the parents could have been planning to use the funds from the sale of the house for their retirement.
In any case, before starting this process, you need to be sure there's open and honest communication between both parties and that your relationship is in a good place. After all, family is much more important than real estate.
Pros and cons of buying a house from your parents
You could save money
It's likely that the biggest benefit of buying a home from your parents is the ability to save money. On the one hand, while you'll still have to be able to prove that you have enough income to get a loan, you won't necessarily need to have the funds for a down payment. Your parents can give you a gift of equity, which can take its place.
On the other, your parents could potentially save money on closing costs. Typically, in a real estate transaction, the seller is responsible for paying the real estate agent's commission fees. Since this is not an arm's-length transaction, you don't necessarily need to use an agent, which can save your parents thousands of dollars.
The transaction can be more flexible
Families often work together and help each other out when needed. It's likely that the same will happen if you enter into a real estate transaction with your parents. For example, if you need a specific closing date, odds are your parents will be willing to accommodate that request. On the other hand, if your parents don't have the funds necessary to cover repair costs, odds are that you may be willing to accept the house in "as-is" condition.
It could cause family strife
However, just like family members can go out of their way to help each other, tempers can also get heated easily. That's why, even though it's not required, it's best to hire a real estate agent to help you draw up a purchase agreement. That way, everything will be in writing and you'll have an intermediary to help resolve any conflicts.
There could be additional financial implications
Particularly if your parents sell their home to you for less than the fair market value, there could potentially be some tax implications. In that case, the IRS will treat it as though your parents gave you a gift in the amount of the difference between the sale price and the fair market value. you must file a gift tax return for it, and the net amount goes against your unified federal gift and estate tax exemption.
As the child in this scenario, be aware that while buying a house for a lower sale price may put more money in your pocket now, you're more likely to be subject to the capital gains tax when you go to sell the house later on.
Steps for buying a house from a parent or family member
Get pre-approved for a mortgage
The first step in buying a house from your parents is going to a mortgage lender or bank to get a pre-approval. During the pre-approval process, the lender will vet your income, debts, assets, and credit score in order to tell you how much they're willing to offer you in a loan. This will give you a better idea of how much you can afford to spend on a home.
Determine a purchase price
Next, it's important to come up with a purchase price for the home. One way to do this is to have a real estate agent complete a comparative market analysis to determine the fair market value of the home. However, if you can't afford to pay fair market value for the property, it may be wise to figure out what you can afford to pay in a mortgage payment and determine the purchase price from there.
Complete a purchase agreement
Once you've decided on a sale price that works for both parties, the next step is to get it all in writing. Again, it's a good idea to have a real estate agent work up a purchase agreement for you. However, you can also ask an attorney to draw up a contract for you, if you would rather pay those fees as opposed to a real estate commission.
Go through the underwriting process
The next step is to apply for a mortgage and go through the underwriting process. Here, your lender will thoroughly vet your finances to ensure that you qualify for a loan. You'll likely have to provide plenty of financial documentation, including W2s or tax returns, pay stubs, and statements for any assets so that the bank can rest assured that you're capable of making your mortgage payments.
Close on your parents' house
After you've been approved for the loan, your lender will likely either send you to a notary or schedule a meeting with their title company to help you close on the loan. As you sign all the documents, be sure to read them over carefully so that you can verify that the figures outlined -- such as the sale price, mortgage payment, and closing costs -- match what was outlined for you when you were given your loan estimate.
The bottom line
Buying a house from your parents may be slightly different than undergoing a traditional arm's-length transaction. However, when done right, it can have many benefits. With that in mind, use this as your guide through the process. With any luck, you and your parents will be able to reach an agreement that works well for everyone involved.
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