Buying a House from Parents or Family? Here's What to Consider

By the Mercury Team

Home buying can be a stressful and costly process, so you may wonder if purchasing a house from your parents or family is a better choice than buying from a stranger. Here are some considerations you should keep in mind if you decide to go down this route.

Pricing Your Parents’ Home

The first step in buying your parents’ house is negotiating a price. These three key components can help you reach a home estimate that’s fair for both you and your family.

1. Home appraisal — An appraisal is an unbiased professional opinion to help determine a home’s fair market value. If you’re thinking about mortgaging the house, you’ll likely be required to get an appraisal.
2. Comparative market analysis (CMA) — Consider contacting a real estate agent for a comparative market analysis. A CMA is a tool real estate agents use to evaluate a home’s market value based on recently sold homes in the same neighborhood.
3. Online valuation tools — You may get a general idea of the home’s value via an online home value estimator. However, the results might not be as precise as a CMA.

Legal Representation

The next step is to decide whether you should get legal representation. It’s common not to use a real estate agent for family-to-family transactions, but it can be a disadvantage because you won’t have access to their legal knowledge and guidance. Their assistance comes in especially handy when preparing and filling out paperwork.

If you decide not to use a real estate agent, consider reaching out to a real estate attorney to help review the document and purchasing agreements before all parties sign the dotted lines.

Written Agreements to Buy Your Parents’ Home

While it may seem overblown to draft contracts between you and your parents, a real estate transaction must be in writing to make it legally binding. Plus, proper documentation helps keep the process on track if things get complicated.

If you hire a real estate agent, they’ll prepare a purchase agreement, which generally includes:

• The home’s price and terms
• Buyer and seller information
• A legal description of the property
• Items included and excluded in the sale
• Contingencies
• Closing date

Document Any Gifts of Equity

A down payment is often the biggest obstacle potential homebuyers have to face. If this is the case for you, your parents may want to consider helping you out with a gift of equity. This is when your parents or relatives agree to sell their home to you for below market price. The difference between the two prices is what creates the gift of equity. You can use this to cover your down payment, making it easier to secure a mortgage.

However, there are two requirements both parties must do to make the gift of equity legitimate:

• Equity letter — This letter outlines all the information about the gift of equity, including the sale price and appraisal price. Both you and your parents must sign this letter.
• Official appraisal — Your parents must have an official appraisal done to complete the gift of equity. Both parties use the appraisal to determine the sale price and gift of equity.

Evaluate the Mortgage

When it comes to getting a mortgage, you first need to assess the current situation of your parents’ home. Here are some possible scenarios:

• If your parents own the house, you can buy it with cash or apply for a new mortgage.
• If your parents haven’t paid off their mortgage, check to see if it’s an assumable loan. This means you can take the mortgage and continue making payments.
• If your parents haven’t paid off their mortgage and the loan is not assumable, contact the lender and see if they can arrange a transfer. Otherwise, you may need to apply for a new mortgage.

Close the Sale

You need to schedule a closing to make the sale official. The closing can be at a bank, title company, or your attorney’s office. Ensure that all the terms and conditions on your closing documents are correct. Also, make sure the closing costs and agreed price are accurate.

The Pros and Cons of Buying a Home from Your Parents or Family

If you’re still unsure about whether to buy a house from parents or a family member, consider some of the pros and cons:

Pros

• You could save on the sales price and closing costs
• You may not need a down payment with a gift of equity
• No competition from other buyers

Cons

• Potential conflict
• Possible tax issues with a gift of equity
• You may need traditional financing, especially if they haven’t paid off the mortgage

Buying a home from your parents or a family member may be a good idea for your future, but the process can get complicated. If you decide to go through with it, you’ll eventually need homeowners insurance. Mercury offers affordable, reliable coverage to keep your new property protected.

Talk to a Mercury agent about a homeowners insurance quote today.