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There are a number of reasons you may want to buy your parents’ home. First and foremost, doing so may allow you to preserve childhood memories and keep such a special place in the family.Buying your parents’ home may also give you the opportunity to provide your parents with financial support that they may need in their golden years. Additionally, this type of transaction may save you money on the home-buying process.
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Let’s dive deeper into the benefits and obstacles of buying your parents’ home, as well as the steps you can expect to take if you decide to go this route.
Benefits of buying your parents’ house
If you love your parents’ house and they hope to sell it, buying their home can benefit everyone. Here’s a look at the potential benefits:
- Low or even no down payment: According to Christian Hernandez, senior loan originator at Mares Mortgage in San Juan Capistrano, Calif., you may be able to structure the transaction so that you can purchase your parents’ home with a low or even no down payment.“Your parents can treat you to a gift of equity. For instance, if you only have 5% of your own funds for the down payment, your parents can give you 15% of their equity to use toward your down payment. This can allow you to put 20% down and avoid private mortgage insurance,” Hernandez said.
- Lower closing costs: Regardless of whether your parents help you with closing costs or you pay for them on your own, you can save a great deal of money on closing costs. “Since there is no need for a real estate agent to assist with this type of transaction and collect commission, you can save 4% to 6% on closing costs,” Hernandez explained.
- Flexible closing times: If you decide to purchase a home from a stranger, you may find it difficult to find a closing date that works for both of you. Buying your parents’ house, however, allows for flexible closing times. You can work with your parents to determine closing and moving dates that are convenient for both of your schedules.
Just like all real estate transactions, buying your parents’ home does come with a few potential obstacles:
- You still have to qualify for mortgage: Even if you decide to buy your parents’ home, you will be required to qualify for a mortgage. Your credit score, debt-to-income (DTI) ratio, income and down payment will all be considered.
- Mixing finances and family can be dangerous: Mixing finances and family isn’t always a good idea. If you buy your parents’ home, understand that something may go wrong. Amy Irvine, certified financial planner at Irvine Wealth Planning Strategies LLC in Corning, N.Y., explains that this type of transaction may cause issues if your siblings want your parents’ home as well, or if you purchase the home with your spouse and end up getting divorced. “When I purchased my in-laws’ house with my husband, we decided that in the event of a divorce, he would buy me out because the house is his family’s property. It is important to think about worst-case scenarios like divorce when buying your parents’ home,” said Irvine.
- Lack of real estate agent could have drawbacks, even though it provides savings: While buying your parents’ home without a real estate agent can save you money, it can also lead to confusion. If you don’t work with a real estate agent, you may not understand the best way to handle your transaction and be unaware of the legal implications if something goes wrong. “A real estate agent can strategically structure the transaction to benefit everyone,” said Hernandez.
How to negotiate a price
When a real estate agent is involved in the home-selling process, he or she will typically suggest a fair sales price after looking at the home’s Comparative Market Analysis, or “comps.” Comps are based on homes that are located in the same area that are currently for sale or have recently sold and are similar in condition, size and features.
If you are buying your parents’ home without a real estate agent, you can use internet tools to perform some research to determine your comps. Ian Bloom, a certified financial planner at Open World Financial Life Planning in Raleigh, N.C., suggests a house inspection before negotiating a price, as that can help you thoroughly evaluate the home’s condition.
“You can and should trust your parents, but there may be problems with the home that they don’t even know about yet. If the inspection reveals the roof needs fixing, ask your parents to cover it or negotiate a lower price,” Bloom said.
Steps to buying your parents’ house
Now that you understand the benefits and potential obstacles of buying your parents’ house, as well as how to negotiate a price, let’s take a close look at the steps involved in this type of transaction.
Step 1: Get preapproved for a mortgage
To find out if you qualify to purchase your parents’ home, you’ll need to get preapproved for a mortgage. Find out whether your parents are willing to gift equity and/or take care of your closing costs, and let the lender know if there will be a gift of equity and what type of down payment you have. Then, the lender can work with you to figure out the ideal loan for your situation.
Depending on your situation, the lender may recommend a Federal Housing Administration (FHA)-insured mortgage loan, as FHA loan rules do allow one family member to sell a home to another relative.
Step 2: Determine a purchase price
Once you’ve performed internet research and used the free resources available, agree on a purchase price with your parents.
Step 3: Involve professionals
Even if you’re purchasing a home from your parents and have a great relationship with them, understand that this transaction can have legal, financial and tax ramifications.To ensure you are aware of these ramifications and the deal is completely legal and valid, it’s wise to speak to a real estate attorney, tax accountant and financial adviser.
Step 4: Complete a purchase agreement
The purpose of a purchase agreement is to outline the price you agreed upon with your parents, as well as the purchase terms. You can reach out to a real estate attorney to access the appropriate form for your state or contact your state’s Real Estate Commission for a template. The purchase agreement will need to be signed by you and both of your parents, if applicable.
Step 5: Apply for a mortgage
Once the steps listed above are complete, it’s time for you to officially begin the process of applying for a mortgage. You’ll be required to fill out an application and will likely need to wait for your parents’ home to be appraised. In the event the appraisal is less than the purchase price, you may have to negotiate a lower sales prices with your parents.
Step 6: Go through the underwriting process
Even if you’re buying your parents’ home, you’ll need to go through the underwriting process as you would if you were buying a stranger’s home. During this process, your lender will review your pay stubs, bank statements and other documentation to determine whether you’ll be able to repay the mortgage. If everything goes smoothly, your lender will inform you of a closing date.
Step 7: Close on your parent’s home
You may need to visit your lender’s office or a title company to close on your parents’ home. Be sure to read every closing document thoroughly prior to signing. Ensure there are no errors with the sales prices, mortgage amount, interest rate and other terms. Once you sign all the documents, the ownership of the property will be in your name and you’ll be ready to begin living in your parents’ home.
Step 8: Take care of the post-close details
After closing, you will likely find there are small details to work out. “For instance, if your parents gave you the gift of equity, you’ll need to file a gift-of-equity tax return.You’ll also need to transfer utilities in your name,” Bloom said.
While buying your parents’ home can benefit both you and your parents, don’t forget that it is still a large and legal transaction. Think about the reasons you want to buy your parents’ home, and make sure you won’t regret doing so down the road. If you decide that buying your parents’ home is right for you, document everything to avoid future conflicts and keep an amicable relationship with your family.
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