Buying Home From Family Members Mortgage Guidelines

Buying Home From Family Members With Gift of Equity

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers the mortgage guidelines for buying home from family members. Gustan Cho Associates get many calls from home buyers about buying home from family members. There are many benefits to buying home From Family Members. Many home buyers often want to purchase a home from their parents. They were often raised in the home and are familiar with the neighborhood.

Buying home from family members can be a win-win situation. The home can stay in the family. Many folks want to sell their larger homes when they become empty nesters and need to downsize. They often like their children to purchase their homes so it stays in the family. Buying home from family members is very common.

There are specific mortgage guidelines for buying home from family members. In this blog, we will discuss buying home from family members and the guidelines for buying home from family members. Buying home from family members is often called Non-arm’s length home purchase transaction. There are specific rules and guidelines for home buyers buying home from family members.

Buying Home From Family Members Mortgage Guidelines On Arm’s Length Transactions

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It is not always the case that children inherit homes from their parents. Many homeowners often sell their homes and downsize to smaller homes. However, homeowners can often sell the family home to their children at a discount. Alex Carlucci, a senior loan officer at Gustan Cho Associates, explains buying home from family members with no down payment and closing costs with a gift of equity as follows:
Examples of non-arm transactions are buying and selling among family members, parents, children, grandparents, grandchildren, close business members, or long-term close friends.
Memories are made in homes. They may want the family home to remain in the family for generations to come. When lenders analyze the transaction types on home purchases, they want to know whether they are arm’s length versus non-arms length transactions.

Difference Between Arm’s Length Versus Non-Arm’s Length Home Purchase Transactions

An arm’s length transaction is when a homebuyer and seller do not have a financial interest in each other In most non-arms transactions. People do not know each other. Many grandparents or parents may sell their homes to their grandchildren or children at a low price with favorable terms they would otherwise not sell to a stranger.

People that know each other may still have an arm’s length transaction. For example, a co-worker may want to purchase a home from another co-worker. This type of transaction is considered a non-arm’s transaction. It is a transaction where the homebuyer and sellers have no financial interest, whether they know each other or not.

It is up to each party to get the best deal for themselves. The agreed-upon price is often derived close to the market value since each side is acting to get the best deal. The sellers want to get the highest price, while the buyers want to get the lowest price. The price negotiated and executed is a price somewhere in the middle. The opposite occurs in a non-arms-length transaction.

Benefits of Buying Home From Family Members

Some homeowners have strong feelings about selling their homes to strangers. A home is where memories are made. Homeowners selling a home to a family member know who the new buyer will be. Homebuyers know who the seller is. They know how well they maintained the home.

Non-arm transactions are also called arm-in-arm transactions. Non-arm transactions are transactions when both parties have a personal or professional close relationship.

The home seller is often a family member who is part of the buyer’s everyday life. Normally, a realtor is not required on non-arms-length transactions. Home sellers and buyers will save money since they do not have to pay the 6% real estate sales commission. There is more flexibility in quarterbacking sales. Normally earnest money is not exchanged hands.

Buying a Home From Family Members With a Gift of Equity

Homeowners can offer a gift of equity at a discount to a family member. By providing a gift of equity, the seller agrees to take lower net proceeds from the home’s sale, thus gifting the buyer some of their equity. The gift of equity can be used for the down payment when buying a home from a family member at a discount.  Private mortgage insurance is not required if the gift of equity is greater than 20% of the property’s purchase price.

Gift of Equity Mortgage Process

An appraisal is required on a gift of equity transactions to determine the property’s fair market value. The homeowner selling the home must have equity in the home for the gift of equity.

Special paperwork and guidelines the mortgage lender provides must be completed and submitted. The gift must be noted in the closing settlement statement.

Oftentimes, it is recommended that business and family do not mix. Ensure there are no misunderstandings when buying a home from a family member. You must trust the family member you are buying or selling a home. Both buyers and sellers should do their due diligence and not have any thoughts that one is taking advantage of one another.

Tax Consequences on a Gift of Equity Purchase Transactions

A gift of equity of more than $15,000 for a single home buyer and over $30,000 in the gift of equity for a married couple may have tax consequences. Home sellers may also need to report capital gains taxes on the sale. John Strange, a senior loan officer at Gustan Cho Associates, explains the tax consequences of buying home from family members through a gift of equity purchase transactions as follows:

You must consult your accountant or financial advisor before executing a gift of equity sale transaction.  Gustan Cho Associates are experts helping homebuyers with the gift of equity transactions.

For more information about the gift of equity home purchase transactions, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.

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