If you’re thinking about buying mom and dad's house, there are many things to consider before moving forward.
Purchasing a home is a substantial financial decision. And when a big-money decision involves family, it should be carefully considered.
5 Common Reasons for Buying Your Parents’ House
You might have multiple reasons for debating buying a house from your parents.
Here are the five common reasons to make the purchase:
1. Sentimental value.
Your childhood home and “things” can bring up memories and create a sense of nostalgia, making them more challenging to let go.
You might consider buying your parents' house to keep it in the family or preserve the memories.
2. Financially help parents.
This is a frequent reason people give for buying their parents’ home. Elderly parents, in particular, might have problems with debt or getting by on a fixed income.
The proceeds from the sale of their home can help fund their later years.
3. Discounted price (instant equity).
Sometimes people buy a home from mom and dad because they can purchase it for less than fair market value or receive a “gift of equity” to help make the purchase.
4. Private seller-financed mortgage.
Parents sometimes help their children out by selling them their home and providing seller financing to help them save money. Or if there are issues with obtaining a traditional home loan.
If your parent holds the mortgage, you may also be able to:
- put down a smaller downpayment
- avoid paying for private mortgage insurance (PMI)
- get a lower interest rate on their loan
- pay less closing costs
5. Investment (rent/flip).
Additional Reading: Is Selling Your Home To Someone You Know A Good Idea?
Risks of Buying Your Parents’ Home
When it comes to buying a house from mom and dad, there are significant family and financial risk considerations to keep in mind.
Lingering emotions and attachment.
Attachment to the memories you had in mom and dad's house could interfere with your ability to make a sound, well-thought-out financial decision.
Whether you plan to live in the house, rent it (to your parents or someone else), or sell it, realize any sentimental value the home holds for you and your family could interfere. Or, at the very least, cloud your judgment.
Not only that, but other family members, including mom and dad, might have some sense of ownership of the house even – after you buy it.
When other family members get involved, the situation gets more complicated.
Some family members may want to keep it in the family, leaving it exactly as it was in their memories too.
Before moving forward with buying your parents’ home, weigh the impact of the sentimental value of the house – to you and other family members.
Other family members’ resentment.
Buying your parents’ home can be a sticky situation. Especially when it comes to different family members' feelings on the matter.
This could be particularly true if you get a “good deal.”
When other family members get involved in the details of the purchase, not only can it complicate your finances, but your relationships too.
Can be a drag on finances.
When your motivation for purchasing the home is based on your parents' financial need, your finances could suffer in your attempts to help them out.
Whether you’re buying the house from mom and dad so they can move somewhere else, or they're renting the home from you, you'll be the one dealing with the repairs, maintenance, and associated costs that go along with owning a home.
Possible tax consequences.
Depending on how the purchase is structured, buying your parents’ home could have tax consequences for both you and your parents.
For instance, if your parents sell the house and don’t buy another, they might have to pay capital gains taxes (unless they qualify for an exemption).
If your parents hold the mortgage for you, they will have to count the payments as income. And don’t forget you'll inevitably need to pay real estate taxes.
Potential Benefits of Buying Mom & Dad's Home
While there can definitely be drawbacks to buying your parents’ home, it can also be a real win-win situation for some families.
Can be a boost to finances.
Depending on the financials, buying your parents’ home might be profitable for you.
As long as everyone involved agrees on the structure and purchase price of the house, and you can realize a profit, buying the home could help you build wealth. Just like any other real estate investment.
Can ease the burden of a home sale for mom and dad – and you.
When you buy the home, you and your parents won’t have to deal with the typical responsibilities associated with buying and selling a home.
You probably won’t need to hire a real estate agent, pay real estate commission, or worry about the logistics, such as coordinating showings and timing the closing.
Depending on the situation, you'll likely be familiar with any quirks or issues with the house, too—something you don’t have when buying any home on the street.
How Can I Buy My Parent's House and Transfer Ownership?
Of course, you can buy the home from your parents as you would from any other seller.
Since it’s family you’re dealing with, it’s crucial to take extra steps to make sure everyone’s on the same page. And that it’s a fair deal for all.
The Home Purchase
Here are some suggestions to help make the purchase amicable for everyone involved:
- Get a market analysis (to find the actual market value of the home)
- Make sure everyone involved agrees on a fair sales price
- If you don’t hire a real estate agent, hire a real estate attorney to facilitate the contract and closing
- Sign a formal contract (purchase agreement)
- Get a 3rd party appraisal
- Get a home inspection (even if you don’t think you need to)
Problems occur with a lack of clear expectations and understanding by all involved.
Make sure everyone is communicating openly during the home buying process and using the same channels you would if you were buying/selling property from a stranger.
Gift/Gift of Equity
If you don’t have a down payment for the home, some lenders allow parents to offer a “equity gift” to family members.
The equity is the difference between the value of the home and the amount owed on the house.
A gift of equity means your mom and dad give you all, or a portion of, the equity they have in the house.
The bank or mortgage lender allows you to use it instead of or in addition to some cash down payment. This will require specific paperwork.
You'll still need to go through the mortgage application and underwriting processes to meet the lenders’ requirements, which will include pulling your credit score and credit history.
Keep in mind, depending on individual circumstances, using a gift of equity can have tax and other financial implications.* Consult a tax professional if this is a concern.
A life estate is an alternative to children buying a parent’s home if the mom or dad wishes to stay in the house and use it as their primary residence until their death.
It’s legal joint ownership of the property, with the “life tenant” (parent) living in and having possession of the property until their death.
The “remainderman” (in this case, child) takes possession of the property after the death of the “life tenant” or life estate holder.
One benefit of the life estate is that, at the time of the life tenants’ death, the property will not go through probate. But instead, transfer directly to the joint owners (remainderman).
Even though the property doesn’t go through probate, it is still subject to estate taxes, depending on the value.
Final Thoughts on Buying Your Parents House
In the end, you must be aware that since you’ll be mixing money and family, issues you won’t otherwise deal with in the purchase of a home will inevitably arise.
People come up with creative ways to buy their parents’ homes. But the most important thing is that everyone involved is smoothly in agreement with the situation, financially and otherwise.
Facilitating open communication with your parents and going through the same steps you would if buying a stranger’s home is crucial to making it work for both you and your family.
Do your homework, talk to the pros, and put everything in writing.
*Possible Medicaid ineligibility. In some instances, if parents gift or transfer their home to one of their children, but continue to live in it, and then later apply for need-based Medicaid services within a short period, they could be denied benefits due to the transfer. While local laws vary, there is often a waiting period (typically five years) for Medicaid eligibility after the transfer of property.
Article written by Amanda
Updated July 2020