There are a lot of things that go into buying a home, such as looking for a home, finding the perfect place, making an offer and competing with other buyers. One potential way to simplify the stress of a competitive market is to buy a house from a family member. This is called a non-arm's length transaction. A non-arm's length transaction is a transaction between a buyer and seller who have a preexisting relationship, as opposed to an arm’s length transaction, where the parties have no prior affiliation. Let’s learn more about how to buy a house from a family member, along with some pros and cons.
There are a handful of reasons why buying a house from a family member may look like an attractive option. For instance, maybe a family member is downsizing or moving somewhere warmer for retirement. This may allow you to purchase a turn-key property that you know was well-maintained, in a neighborhood you’re familiar with. You may also want to purchase a home for a sentimental reason, such as if your parents are selling your childhood home. Another reason could be that you don’t have enough money saved for a down payment. In this case, the family member may offer a gift of equity.
A gift of equity occurs when a property is sold to a family member or close associate at a price lower than the current fair market value. The difference between the sale price and the market value is the gift of equity. For example, if your parents own a home worth $350,000 and they sell it to you for $200,000, you receive a gift of equity of $150,000. Most lenders will allow the equity to be used toward a down payment. A gift of equity must be documented through a gift of equity letter, and the homebuyer must independently qualify for a mortgage.
In some ways, buying a house from family works the same way as buying a house on the open market. Overall, however, the process is generally expedited as it eliminates the need for house hunting and negotiating offers. The steps typically include the following:
As with anything, there are both pros and cons when it comes to buying a house from family. While terms will differ from person to person, these are some of the pros and cons you may experience:
Buying a house from a family member could potentially be a foray into homeownership or provide a chance to upgrade from your current house. When you look at the logistics of how to buy a house from a family member, the process may be relatively faster, less stressful and more cost-efficient than a standard market sale tends to be. However, keep in mind that money can also become a source of conflict, even between close family members. Typically, there are more pros than cons, but everyone’s experience differs.
Yes, your parents can sell you their house below market value if they choose to do so. This may qualify as a gift of equity, in which case they will have to fill out a gift of equity letter.
Yes, you may use a mortgage to purchase your parents’ home, or potentially assume their mortgage if they have one — note, however, that this is up to the lender’s discretion and approval is given on a case-by-case basis. Your options will depend on your specific circumstances, so you may want to talk to a lender and real estate attorney to learn more.
A non-arm's length transaction is a transaction in which the buyer and seller have an existing personal relationship. For instance, if your parents sell you their house, that would be considered a non-arm's length transaction.