How to Buy Your Parents House: Everything You Need To Know

Table of Contents

• Want to Buy Your Parents House? Here’s What You Need to Know
• How Does Buying a House From Your Parents Work?
• What Is a Gift of Equity?
• How a Gift of Equity Can Make Buying Your Parents’ House Easier
• Does the Home Still Need an Appraisal?
• Can Your Parents Give You Money Instead?
• What If Your Parents Want to Sell the House Below Market Value?
• What If You Don’t Need a Gift of Equity?
• Other Things to Consider When Buying Your Parents’ House
• Why Buying Your Parents’ House Can Be a Smart Move
• Why You Can Trust Treadstone Funding + Neighborhood Loans
• FAQs

Want to Buy Your Parents House? Here’s What You Need to Know

Buying a home from your parents or grandparents is absolutely possible, and it can be a great way to keep a property in the family while helping the next generation become homeowners.

The transaction works much like any other home purchase: you agree on a purchase price, apply for a mortgage if needed, complete the necessary inspections and appraisal, and close on the property.

The biggest difference is that you’re buying from someone you’re related to.

That means there are a few additional details to get right, particularly if your parents want to sell the home for less than its current market value or give you some of their equity to help with the purchase.

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How Does Buying a House From Your Parents Work?

The first step is determining what your parents want to accomplish with the property.

Maybe they’re downsizing and would rather sell the home to you than put it on the open market. Maybe you grew up in the house and want to keep it in the family. Or maybe your parents want to help you become a homeowner without simply handing you a large amount of cash.

Once you agree on the basic terms, your mortgage lender can help determine how the purchase should be structured.

You may be able to use a conventional, FHA, VA, or other mortgage program depending on your qualifications and the property.

The important thing is to be upfront about the family relationship. Buying a home from a relative is a legitimate transaction, but the lender still needs to document the sale and make sure the purchase meets the requirements of the loan program.

What Is a Gift of Equity?

A gift of equity is one of the biggest advantages of buying a home from your parents.

Instead of your parents simply giving you cash, they can potentially give you part of the equity they have in the home as a credit toward the purchase.

For example, imagine your parents own a Michigan home worth $300,000. They agree to sell it to you for $250,000.

The $50,000 difference can potentially be structured as a gift of equity, assuming the transaction meets the applicable loan program’s requirements.

That equity may be used toward your down payment and certain closing costs. Fannie Mae specifically allows qualifying gifts of equity to be used for a principal residence or second-home purchase, subject to its requirements.

In other words, your parents don’t necessarily have to hand you $50,000 in cash to help you buy the house. Their existing equity in the property may be able to do some of the work.

How a Gift of Equity Can Make Buying Your Parents’ House Easier

A gift of equity can potentially reduce the amount of money you need to bring to the closing table.

Depending on the loan program and your circumstances, it may help with:

• Down payment requirements
• Closing costs
• Prepaid expenses

Fannie Mae requires documentation for a gift of equity, including a signed gift letter and documentation showing the gift on the settlement statement.

Your lender will also need to verify that the transaction and gift meet the applicable underwriting requirements.

This is why it’s important to talk to your lender before deciding on a purchase price or assuming that a certain amount of equity can be used.

Does the Home Still Need an Appraisal?

In many financed transactions, the property will still need to go through an appraisal process. Although some properties may receive an appraisal waiver, your lender cannot control this and will notify you if your transaction qualifies.

The appraisal is particularly important when you’re buying from your parents because the agreed-upon purchase price may be different from the home’s market value.

For example, if the home is worth $300,000 and your parents sell it to you for $250,000, the appraisal helps establish the property’s market value for the mortgage transaction.

The lender needs to make sure the property and loan meet the requirements of the mortgage program being used. It is also a great way for the buyer to understand the value of the new asset they are purchasing, and how big of a hug to give to mom and dad.

A family sale doesn’t mean the normal safeguards disappear. In fact, having an independent appraisal can help make sure everyone understands what the property is worth.

Can Your Parents Give You Money Instead?

Your parents may also be able to provide gift funds rather than a gift of equity.

These are two different strategies.

With gift funds, your parents give you money that may be used toward eligible homebuying expenses. With a gift of equity, the value comes from the equity your parents already have in the home you’re purchasing.

Fannie Mae allows qualifying personal gifts from eligible donors to be used toward a down payment, closing costs, or financial reserves for eligible principal-residence and second-home transactions, subject to its requirements.

Which approach makes more sense depends on the family’s finances and the structure of the transaction.

What If Your Parents Want to Sell the House Below Market Value?

This is where buying a family home can get especially interesting.

Parents don’t necessarily have to sell their home for the exact amount they could receive on the open market. They may choose to sell it to their child at a price that reflects their desire to help the next generation.

However, the difference between the home’s value and the purchase price needs to be properly documented.

That’s where a gift of equity can potentially come into play.

The important part is making sure everyone — from the buyer and seller to the lender and title company — understands exactly how the transaction is structured.

Don’t simply agree on a discounted price and assume the rest will work itself out at closing.

What If You Don’t Need a Gift of Equity?

You don’t have to use a gift of equity.

If your parents want to sell you the home at or near its market value and you have enough money for the required down payment and closing costs, the purchase can generally be handled like a more traditional home purchase.

You could also explore whether your parents can provide eligible gift funds separately.

The best strategy depends on the home’s value, the agreed-upon sales price, your available assets, and the mortgage program you’re using.

Other Things to Consider When Buying Your Parents’ House

The mortgage is only one part of the decision.

Before moving forward, consider:

Property condition:
Buying a home from your parents doesn’t mean you should skip an inspection. An inspection can identify repairs or maintenance issues before you become responsible for the property.

Property taxes:
Michigan property taxes can change after a property transfers ownership, so don’t assume you’ll automatically pay the same amount your parents currently pay.

Homeowners insurance:
Make sure you understand the cost of insuring the property and whether any updates are needed to obtain coverage.

Title and legal documents:
A title company or real estate attorney can help make sure ownership transfers correctly and that the transaction is properly documented.

Family expectations:
This one isn’t technically a mortgage requirement, but it’s important anyway. Make sure everyone agrees on the purchase price, timing, responsibilities, and financial arrangements before signing anything.

Buying a house from your parents can be a wonderful opportunity. It can also get complicated when family relationships and finances overlap. Clear expectations are your friend.

Why Buying Your Parents’ House Can Be a Smart Move

There are obvious financial benefits to buying a family home, particularly when a gift of equity is involved.

But there can be other advantages, too.

You may already know the neighborhood, the property’s history, and how the home has been maintained. Your parents may prefer selling to someone they know rather than preparing the house for a traditional listing.

And, perhaps most importantly, the transaction can create an opportunity to build equity in a home that has already been part of your family’s story.

That’s a pretty good starting point for homeownership.

Why You Can Trust Treadstone Funding + Neighborhood Loans

Over the last 23 years, Treadstone Funding + Neighborhood Loans has helped thousands of Michigan buyers navigate mortgages for all kinds of situations—including transactions involving family members.

Our loan officers can help you understand whether a conventional or other mortgage program fits your situation, how gift funds or a gift of equity may work, and what documentation you’ll need before moving forward.

Because family transactions can have additional moving pieces, having an experienced mortgage team involved early can help prevent surprises later.

Whether you’re buying the house you grew up in or helping your parents transition into their next chapter, we’re here to help you understand your options and build a mortgage strategy that makes sense.

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FAQs

Can I buy my parents’ house with a mortgage?

You can generally use mortgage financing to buy a home from your parents, provided you and the property meet the requirements of the mortgage program. Family transactions are allowed under applicable conventional lending guidelines, although additional documentation may be required.

Can my parents give me equity when I buy their house?

Yes, a qualifying gift of equity can potentially be used toward the purchase of a home from an eligible family member. Under Fannie Mae guidelines, a gift of equity can be used toward a down payment and closing costs for eligible principal-residence and second-home purchases.

Do I have to pay full market value when buying my parents’ house?

Parents may choose to sell a home to their child for less than its market value, but the transaction must be properly structured and documented. A gift of equity may be one way to account for the difference between the home’s value and purchase price.

Can my parents give me money for the down payment?

Eligible family members can provide gift funds for certain mortgage transactions, subject to the loan program’s requirements and proper documentation.

Do I need an appraisal when buying my parents’ house?

If your mortgage program requires an appraisal, buying from a family member generally doesn’t eliminate that requirement. An appraisal helps establish the property’s market value and gives the lender information needed to evaluate the mortgage.

Is buying my parents’ house cheaper than buying another home?

It can be, particularly if your parents are willing to sell below market value or provide a gift of equity. However, buyers still need to account for the mortgage, closing costs, property taxes, insurance, maintenance, and other costs of homeownership.

Can I buy my parents’ house and use a gift of equity for the down payment?

A qualifying gift of equity can be used toward the down payment and certain closing costs, subject to the requirements of the mortgage program. Your lender can determine how much of the equity can be applied to the transaction and what documentation is required.

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Terms and qualifications are subject to underwriting approval and can change without notice. Not all borrowers may qualify. Credit score and down payment examples are for illustrative purposes.