Buying a home from family: What you need to know

Buying a home from family

Purchasing a home from parents, grandparents, or other family members is more common than you might think. Maybe your parents are downsizing and want to keep the family home in the family. Or perhaps you've been renting from relatives and are ready to make it official.

These transactions can be straightforward, but they do require some specific steps to keep everything above board with lenders.

Why family sales are different

Lenders pay close attention to transactions between family members because of the potential for fraud or manipulation. They want to make sure:

• The sale price reflects actual market value
• No one is hiding financial arrangements
• The buyer can genuinely afford the home

This doesn't mean family sales are harder to finance. It just means you need to document things properly.

Gift of equity: A powerful tool

Here's one of the best parts about buying from family: you can receive a "gift of equity" as part of the transaction.

Let's say your parents' house is worth $400,000 and they agree to sell it to you for $350,000. That $50,000 difference is called gift of equity. It can be used as your down payment, meaning you might not need any cash out of pocket beyond closing costs.

Gift of equity works with conventional and FHA loans. The family member giving the gift just needs to provide a signed letter confirming it's a true gift with no repayment expected.

What you need for a family purchase

Appraisal: The lender will require an appraisal to establish fair market value. This protects everyone by confirming the price is reasonable.

Gift letter: If there's any gift of equity involved, you'll need a letter from the seller documenting the gift amount and confirming no repayment is expected.

Arms-length affidavit: You'll sign a statement confirming the nature of your relationship and that the transaction is legitimate.

Standard loan requirements: Credit score, income verification, and debt-to-income ratio requirements still apply, just like any other purchase.

Common scenarios

Parents selling to children: The most common family sale. Often involves gift of equity to help the next generation get started.

Sibling buyouts: When siblings inherit a property together and one wants to keep it, they can buy out the others' shares.

Grandparent to grandchild: Similar to parent-child sales, sometimes with even more generous gift of equity.

Renting from family and buying: If you've been paying rent to relatives, you can often convert that into a purchase with the owner's cooperation.

Pricing the sale

The sale price matters more than you might think. If the price is too far below market value, lenders may have questions. If it's above market value, the appraisal will flag it.

For most family sales, one of two approaches works best:

1. Market value sale with gift of equity: Sell at full market value, with the seller gifting back a portion as equity. This is clean and straightforward for lenders.

2. Below-market sale: Sell for less than market value, with the difference treated as a gift. Some lenders are more comfortable with this than others.

We'll help you structure the transaction in a way that works for both your family and the financing.

Tax implications

Family sales can have gift tax implications, though they rarely result in actual taxes owed. The annual gift tax exclusion is $18,000 per person (2024), and lifetime exclusions are over $13 million.

If the gift of equity exceeds annual limits, the giver will need to file a gift tax return, but they likely won't owe any tax. We recommend consulting a tax professional for significant gift amounts.

The process

1. Agree on terms: Work out the sale price and any gift of equity with your family member
2. Get pre-qualified: We'll confirm what you qualify for and structure the transaction
3. Order appraisal: Establishes fair market value for the lender
4. Complete application: Standard mortgage process from here
5. Close the sale: Sign papers and officially own the home

Most family sales close in 30-45 days, similar to regular purchases.

Ready to buy from family?

Family home sales require attention to detail, but they're not complicated with the right guidance. Get pre-qualified to see your options, or schedule a call to discuss your specific situation.