Buying a House From a Family Member
Buying a house from a family member allows you the opportunity to purchase a house at a discount with little to no money down from someone you know and trust.
There may be ways to also eliminate some of all of the closing costs when buying a home from a family member.
Benefits of Buying a House from a Family Member
The top benefits of buying a home from a family member are as follows:
- Trust in the seller and potential knowledge of any home maintenance issues
- Easier negotiation process
- Purchasing below market value
- Help with the down payment
- Potential to have them hold the mortgage
- Potential to assume their mortgage
Buying a house from a family member can obviously have huge benefits. See the video below for more on the topic.
Buying a House From Family Below Market Value
One of the benefits of buying a house from a family member is to get that home at a discount. Whether you are buying from your parents, a sibling, grandparents, or any other family member, you could benefit from this type of transaction.
In most instances, they are reducing the cost of the home for you in lieu of a down payment. In some cases the lower purchase price is well below market value which is a great thing for you. The key to making this work is how you position the sale of the home and the reduced price to the lender. The next section about buying with no deposit will explain.
When buying a home from a family member below market value, the lender can treat the purchase as a typical purchase from a non-related seller or as a purchase from a family member with a gift of equity.
For you, it is a huge benefit to purchase the home below market value. For the seller, they should check with an accountant to determine what the tax implications or benefits are for them.
Buying a House From a Family Member With No Deposit or Down Payment
When buying a home from a family member, both conventional and FHA guidelines permit family members to provide you with a gift of equity. Using this tactic is how you buy a house from a family member with no deposit or down payment.
Here is how buying a home from a family member with no deposit works:
First, you will need to understand how much the home is truly worth on the open market. This would be the value of the home if it was appraised. Here is an example:
- Let’s assume the home is worth or could appraise for $200,000
- Let’s also assume your family member may be willing to sell the home to you for a price of $180,000
- The difference of $20,000 would be considered to be a gift of equity which the lender may allow if the seller truly is a family member
If the family member is providing you with a deposit that is less than what the lender requires, you would need to come up with the difference. It is important to work with a lender who not only will allow for the gift of equity but who also knows how to make this work for you.
Buying a House From a Family Member That is Paid Off
If you are buying a home from a family member that is paid off, the process would be the same as if the home still had a mortgage against it. The only difference is there is no mortgage balance to be settled at closing.
You also have another creative option which can help avoid having to come up with a down payment. This would be a solution when you are also buying below market value.
The first step would be to get yourself added to the deed as an owner. Then, you would refinance the home cashing out the money needed to give to your family member. During the refinance process, you would also at that point have the seller removed from the deed. You would be left as the sole owner of the property with a mortgage in your name.
How Do You Take Over a Mortgage From a Family Member?
The only true benefit of taking over a mortgage from a family member is if the interest rate on that mortgage is much lower than the prevailing interest rates today. A secondary benefit may be a reduction in closing costs.
If you plan to take over a mortgage from a family member, that mortgage would need to be assumable. FHA loans are assumable but the person assuming the mortgage would still need to qualify for the mortgage based upon their credit score and debt to income ratio.
One of the negative aspects of this is the family member may still be liable for the mortgage if you were to default. If you are late on your payments, it also may impact their credit if the bank still has them tied to the loan.
Can I Buy a Home From a Family Member Who Has Passed Away?
You can buy a home from a family member who has passed away after going through the legal process based upon whether they have a will that includes the property in question.
If there is a will, then there should be a trustee who can help with the sale of the home. There also may be other heirs to the property who would expect to get paid a share of the property once it is sold.
It becomes very complicated when buying a home from a family member who has passed away. In the end, you may actually be purchasing the home from his or her heirs or from an estate.
What is an Arm’s Length Transaction?
In real estate, an arm’s length transaction is when a purchase is made between a buy and seller who do not have a relationship with one another, meaning they are not family or friends. In a non-arm’s length real estate transaction, the buyer and the seller are either related or are friends. In some instances, lenders have rules or stipulations when there is a non-arm’s length transaction.