Can you buy a house from your parents? You absolutely can. It’s increasingly common for parents to help their children break into the housing market, and buying a home from them can be one of the most mutually beneficial methods.
What's in this Article?
Buying a house from your parents: a great homebuying hack
It’s no secret that young people are finding it increasingly difficult to break into the housing market. Home prices have risen dramatically over the past several years in many markets, a trend that’s expected to continue in 2022.
Housing stock is scarce, creating stiff competition for existing homes and making bidding wars increasingly commonplace.
Homebuyers are looking for hacks on how to get into the market – and buying a house from your parents is a great one.
For one thing, your parents can sell you the home for less than its market value. This is known as a gift of equity. Another benefit is that you don’t have to outbid other buyers (except maybe your siblings). You can skip the stress-inducing process of making an offer and hoping the sellers will accept it, and you probably already know the property pretty well.
You should still schedule a professional home inspection, but if you’ve spent a lot of time at your folks’ place, there are probably going to be fewer surprises than with a home that’s totally new to you. Leaky faucets, rusty hinges, the floorboards that need replacing – you’ll have a realistic expectation of what you’re getting when you buy the home.
The beauty of buying a house from your parents is that they benefit, too.
For your parents, the agreement can fulfill many needs as well, such as:
- Your parents are planning to downsize or move as they get older, so your purchase of their current home provides them with income to purchase a new property
- Your parents own a second or third home, and they want to free up cash. By purchasing one of your parents’ properties, you give them more liquid cash that they can use for traveling, renovations on their other homes, or to purchase investment properties. Meanwhile, they get peace of mind from knowing that you have a stable housing situation and can reap the long-term benefits of homeownership
- Your parents plan to age in their home but need help with the finances and maintenance. Perhaps your parents want to sell you the home but plan to continue living in it. This can be a great set-up, as the sale provides them with cash and gives you a chance to build equity while allowing for a multigenerational living arrangement that supports everyone
8 ways to buy a home from your parents
There are several ways to buy a house from your parents.
Take out a mortgage to buy the house
You can buy your parents’ house as you would any other property, by taking out a mortgage for the cost of the home (minus your down payment).
Although you’re buying from family, the homebuying process will look the same as buying from a stranger. Your lender will order an appraisal to determine the value of the home, along with a title search to ensure there are no conflicts regarding ownership of the property.
You can typically skip the real estate agent, along with their hefty 5-6% commissions. Hire a lawyer to draw one up (more on this below). Split the savings with your parents or just take it as a discount to the sales price. You may come out with instant equity in the home, and your parents could even net a bigger profit.
Buy the home with a gift of equity
Your parents can ease your path to purchasing by giving you a gift of equity, which essentially means they sell the home to you for less than its fair market value. In other words, they are selling it to you for less than they might receive from another buyer.
The difference between the property’s value and the sale price is applied to your down payment. If the gift is greater than 20% equity, you could avoid paying private mortgage insurance on the loan.
To use a gift of equity, your parents will have to submit a gift of equity letter that states their name, contact information, address, and reason for giving the gift. The letter must also include a signed statement that you will not have to repay the donated amount.
Become a co-borrower
If you do not qualify for a mortgage on your own, your parents may be able to refinance to a new loan with you listed as a co-borrower. Both you and your parents will be responsible for the mortgage payments, whether your parents live there or not.
Set up an ownership transfer
In this scenario, your parents would contact their lender and request an ownership transfer. They would need to put your name on the title and file a quitclaim deed. These transfer title and ownership of the home to you.
If the house has appreciated during the period of your parents’ ownership, you will benefit financially from the equity in the home.
Participate in a Qualified Personal Residence Trust (QPRT)
A QPRT transfers the ownership to a trust. The trust is set up so that your parents live in the house for an agreed-upon time. After that period, you move in. A QPRT can save your parents money on gift taxes if the home’s value appreciates between the time the trust is set up and when they move out.
Assume the mortgage
If your parents still have a mortgage, they can approach the lender about having you assume the mortgage. That means you’d take over the loan balance and the remaining payments. This is financially beneficial if the home price has appreciated since your parents took out a mortgage or if interest rates have gone up. The mortgage payments you assume could be much lower than if you purchased it with a new loan at the current value.
Purchase it via a seller carryback
A seller carryback is set up legally by your parents. Effectively, it sets them up as your banker and you make payments to them. This can be advantageous if your credit score or financial situation makes it difficult for you to obtain a mortgage from a lender. Additionally, your parents receive a steady source of income.
Arm’s length vs non-arm’s length real estate transactions
If you purchase the home through a mortgage lender, note that you must inform them that the transaction is taking place between family members.
Real estate transactions between strangers are handled via an “arm’s length” process that assumes each party will act in their own self-interest.
But transactions between family members must be handled via a different process, known as “non-arm’s length,” in which lenders must be alerted to the possibility of manipulation and/or lack of self-interest between the buying and selling parties.
Potential pitfalls of buying a house from parents
You and your parents need to communicate openly to avoid potential pitfalls, including emotional fallout from the sale.
Tough as it can be to discuss money or sensitive issues surrounding the family home, it’s important to express concerns and boundaries as they arise.
For instance, if you purchase your parents’ home:
- Will they still feel a sense of ownership and influence over how the home is used, decorated, or maintained – whether they live there or not?
- Will there be tension or a power struggle once you own the home and are in charge of maintenance, repair, and renovation decisions?
- If it’s your childhood home, how do you feel about moving back in?
- Are you worried about feeling emotional angst or regression by living in your parents’ house?
Financial pitfalls are a concern as well. If you’re assuming a mortgage or becoming a co-borrower, make sure you’re comfortable with the financial obligations. If the home requires significant repair and maintenance, can you handle that financially? Are you ready to take on the cost of renovations?
Ultimately, you want to make sure the sale makes sense for you and your parents and that no one is agreeing to it out of a sense of obligation. If your parents are struggling with mortgage payments and upkeep, you might feel an impulse to buy the home and make life easier on them. But you’ll only be hurting everyone if you buy the house and then feel resentful for making such a commitment.
You may also want to review your parents’ finances with them before agreeing to the terms of a sale. They may be worried about your money situation and be willing to help you out through a gift of equity. But will doing so leave them short on retirement funds or money needed for other expenses?
Don’t assume that because you are working with family, you don’t need outside help from lawyers, accountants, and real estate professionals.
“Transactions between family members often lack formality, as buyers and sellers match the casual tones of their relationships,” says Ben Kruger, a real estate agent with Hilton & Hyland in California. “But this can easily cause the fundamental elements of a real estate transaction to be missed. At a minimum, transactions between family members should include an appraisal to guide conversation around price and a consultation with a financial professional to understand potential tax implications for both sides. A property inspection is also a good idea to help avoid surprises.”
Working with your parents’ financial advisor and yours can alleviate stress around whether the finances make sense for everyone. The advisors may spot potential problems that need to be hashed out, and they may also be able to advise you on any tax strategies or benefits you can take advantage of with the sale.
It’s prudent to consult a lawyer regardless of how you’re buying the house from your parents. You’ll need a contract for any legal obligation, such as a purchase. You also need to make sure that all arrangements conform to standard legal practice and the law in your area.
“Each party may want a lawyer so they can deal with things professionally,” observes Ryan Ross, a Realtor in New Jersey.
Lawyers can dispassionately hash out the details of the sale, whereas that might be more difficult for family members. Even if everyone is excited about the sale, it represents a transition point for both you and your parents, and it may become emotional. Hiring professionals can keep the process moving and ensure that everyone’s interests are fairly represented.
It’s also important to discuss details such as who is going to cover the closing costs or other fees. Ross notes that you need to think of property inside the house as well. “What will be left in the house, and what will be taken? Appliances, tools, carpeting – these things need to be outlined,” he says.
Buying a house from your parents: A family affair
Buying a home from your parents can be a great way to buy a home for less money – and with less stress – than if you were competing for a home in the market. But this decision affects everyone, so it’s important that all parties are fully onboard and that the sale will benefit the whole family.
Buying house from parents FAQs
Yes, your parents can give you a house, either through a gift of equity, an ownership transfer, or a qualified personal residence trust.
If your parents still have a mortgage on the house, they can refinance to a new loan with you as a co-borrower. Should you choose this route, it’s prudent to have a legal agreement specifying ownership percentages that would come into play when making decisions about selling or renovating the house. If you and the other owners sold the house, the amount of proceeds you receive would correspond to your ownership share.
Yes, you can buy your parents’ house for the remaining amount owed on the mortgage if they give you a gift of equity. This allows them to sell you the house for less than its market value (assuming they owe less than that).
If your parents owe more than the house is worth, you could take out a mortgage to buy the house, but you would only be able to borrow up to its fair market value. You’d have to make up the difference in cash.
You can also assume your parents’ mortgage, which means that you take over the existing mortgage in your name. Assuming a mortgage means you are responsible for the monthly mortgage payments and for paying off the loan balance.