Why Buying a Home From a Family Member Can Make the Mortgage More Complicated
Buying a home from a parent, grandparent, sibling, or another relative may seem easier than purchasing from a stranger. You already know the seller, may know the property’s history, and might even agree on a price without extensive negotiations.
But the family relationship can introduce mortgage considerations that are different from those in a typical purchase between unrelated parties.
The Relationship Matters
A transaction between people with an existing relationship may be considered differently from a traditional arm’s-length sale.
That does not mean family transactions are prohibited. It means the lender may need to understand the relationship between the buyer and seller and review the structure of the transaction accordingly.
Being clear about the relationship from the beginning is important.
A Gift of Equity May Be Possible
One feature sometimes associated with family transactions is a gift of equity.
Instead of giving the buyer cash for a down payment, an eligible family member selling the property may be able to provide a portion of the home’s equity as a gift within applicable mortgage guidelines.
How a gift of equity can be used depends on the mortgage program and transaction, and documentation requirements can apply.
Buyers should discuss the proposed structure before agreeing on final numbers.
The Appraisal Still Matters
A family member may be willing to sell a property for less than they believe it is worth, but the agreed price does not eliminate the appraisal process when an appraisal is required.
The property still needs to be evaluated independently for the mortgage transaction.
That can become particularly important when a gift of equity or below-market sale is involved.
Treat It Like a Financial Transaction
Family relationships can make buyers and sellers more comfortable relying on verbal agreements.
A home purchase is too significant for assumptions.
Make sure the purchase price, credits, responsibilities, timelines, and other terms are properly documented through the appropriate transaction paperwork.
Buying a relative’s home can create an opportunity that would never reach the open market. It can also allow a property with family history to remain within the family.
The key is to remember that familiarity between buyer and seller does not eliminate the mortgage process.
Discuss the family relationship, proposed purchase price, and any planned gift of equity with your mortgage and real estate professionals early so the transaction can be structured correctly from the beginning.
You find a home you love, but there is one unusual feature. Maybe the previous owner started adding a bedroom and never finished it. Perhaps a bathroom is partially remodeled, a garage conversion is incomplete, or a new section of the house is still visibly under construction.
Having enough money in the bank is an important part of buying a home, but during the mortgage process, the amount in your account may not be the only consideration. In certain situations, lenders may also need to understand where funds came from. That can surprise buyers who assume that once money reaches their account, its history no longer matters.