How to buy your parents’ home
It’s a dream of many people – to live in the home they grew up in. Or, maybe your parents’ have a sweet home you didn’t grow up in, but still would like to make it yours someday. Yes, you want to buy your parents’ home.
Transactions between family members are in a lot of ways easier – the parties know each other well and there are no intermediaries. But, there are a number of things you should know that can smooth the process for you. Here, we discuss a number of issues and options for how to buy your parents’ home.
Use the standard tools of any sale – purchase contract, appraisal and inspection
It’s great to buy real estate from people you know because the seller can forgo the steep real estate broker fees. But, there are elements of the standard process that you’ll want to keep.
The first is an actual purchase contract. This is a document that outlines the terms of a sale. You can get a purchase contract that is relevant to your state from a real estate lawyer or by contacting your state’s Board of Real Estate.
The second standard element is the appraisal. Both parties should know how much the home is worth to avoid any unpleasant feelings later on.
If there is a mortgage involved in the purchase, the mortgage lender will ultimately order an appraisal. But, in advance, do some leg work yourself and figure out how much the home is worth with a little research into the value of the home, based on recent home sales data. You could also ask the assistance of a realtor, however, be aware that they may charge a commission if they are involved in the actual sale of the property.
The third element you’ll want to keep is the inspection. The home should be properly inspected, again, to avoid any unpleasant feelings (and costs) later on.
Be sure to do a proper, thorough inspection
Before you decide on purchase price, it’s essential that you have the home inspected. After all, the value of the home depends on its condition. Is the roof very old and needs a costly replacement soon? Is the boiler past its estimated life? Are there any issues with the foundation or drainage or pipes?
There are many issues which can add significant cost to remedy, or if major components are found to be wearing out, you’ll want to know about it. A general inspection is usually required by the mortgage lender in order to close, but you should also look for issues outside of the normal inspection.
It may seem a lot simpler to take your parents’ word for the condition of their home, but some issues they may not be aware of. It’s better for everyone, and for family harmony, to identify problems before the purchase price has been decided.
Decide on purchase price
Now that you know what the home is worth, and what the condition of the home is, you can decide together if you want to make it that price or a different price. Often, parents selling to their children will offer a discount. Just be aware that there may be tax implications if a home is deemed to sell under market value, as part of it could be considered a gift.
How a mortgage works when you buy your parents’ home
The mortgage process can be the same as when you buy any other home – you approach a bank to lend you the money, you include your down payment in the amount the goes to the seller (your parents), and obtain a loan for the remaining amount.
Because the process is the same, you’ll need to meet the standard for credit score and income that someone buying any other home would need to meet. After all, you are dealing with a bank, and banks have standards for mortgage qualification.
In lieu, or addition to, a down payment, your parents may choose to gift you equity as part or all of your down payment.
How do equity gifts work with the mortgage process?
To get a standard mortgage, buyers usually make a 20% down payment. For FHA loans, the down payment could be as low as 3.5%.
Instead of a down payment, your parents could choose to gift to you all or a portion of what would have been a down payment. To do this, they would often be required by the lender to write a letter indicating that they are providing a certain amount of equity as a gift.
Let’s say you are buying a home worth $100,000. A standard down payment would be 20%, or $20,000, and you would obtain a mortgage for the remaining $80,000. Alternatively, your parents could decide to gift you the $20,000, in which case you have no down payment, and still get a mortgage to cover the remaining $80,000.
Lenders differ in their requirements for how much of the down payment must be paid by the buyer and how much can be gifted in the form of equity. Some lenders may require the buyer to have some “skin in the game” in the form of a down payment.
Be sure to seek tax advice
You’ll want to make sure that you involve a tax professional while making decisions about buying your parents’ home. Equity gifts can have tax consequences.
The bottom line: treat the process to buy your parents’ home with consideration and care
Even though you know the sellers (Mom and/or Dad!) don’t let familiarity relax your focus on crossing the t’s and dotting the i’s. Follow a process, involve professionals, and carefully consider each step. After all, it’s a big transaction and you want to be left with the warm fuzzies with your loved ones, not regret from either side.