Buying Home From Family Members Mortgage Guidelines

Buying Home From Family Members Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article is about Buying Home From Family Members Mortgage Guidelines

Gustan Cho Associates get many calls by home buyers about Buying Home From Family Members.
  • There are many benefits in Buying Home From Family Members
  • Many home buyers often want to purchase a home by 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 when it comes to Buying Home From Family Members
In this blog, we will discuss Buying Home From Family Members and the guidelines associated with Buying Home From Family Members. Buying Home From Family Members is often called Non-arm’s length home purchase transactions. 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 where children inherit homes from their parents.
  • Many homeowners often sell their homes and downsize to a smaller home
  • However, homeowners can often sell the family home to their children at a discount
  • 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 any home purchases, they want to know whether they are arm’s length versus non-arm’s length transactions.

Difference Between Arm’s Length Versus Non-Arm’s Length Home Purchase 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 with each other.

  • In most of non-arm’s transactions, people do not know each other
  • 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-arm’s length transaction
  • Non-arm’s transactions are also called arm-in-arm transactions
  • Non-arm’s transactions are transactions when both parties have either a personal and/or professional close relationship
  • Buying and selling among family members, parents, children, grandparents, grandchildren, close business members, or long-term close friends are examples of non-arm’s transactions

Many grandparents and/or parents may sell their homes to their grandchildren and/or children at a low price with favorable terms they would otherwise not sell to a stranger.

Benefits Of Buying Home From Family Members
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
  • 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-arm’s 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.

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 is agreeing to take a lower amount of net proceeds from the sale of the home, thus gifting the buyer with 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
  • If the gift of equity is greater than 20% of the purchase price of the property, private mortgage insurance is not required

Here is the gift of equity mortgage process:

  • An appraisal is required on a gift of equity transactions to determine the fair market value of the property
  • The homeowner selling the home needs to have the equity in the home for the gift of equity
  • Special paperwork and guidelines provided by the mortgage lender needs to be completed and submitted
  • The gift must be noted in the closing settlement statement

Often times, it is recommended that business and family do not mix. Make sure there are no misunderstandings when buying a home from a family member. You need to trust the family member you are buying and/or selling a home. Both buyers and sellers should do their own due diligence and not have any thoughts that one is taking advantage of one another.

Tax Consequences On A Gift Of Equity Purchase Transactions
Tax Consequences On A Gift Of Equity Purchase Transactions

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 as well. It is highly recommended that you consult with your accountant and/or financial advisor before executing a gift of equity sale transaction.

Gustan Cho Associates are experts in helping homebuyers with gift of equity transactions. For more information about gift of equity home purchase transactions, please contact 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 7 days a week, evenings, weekends, and holidays.

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