Buying House from Parents: Is It a Good Idea?

Times are tough, and buying a house is tougher. In fact, according to the National Association of Realtors, the median existing-home price for all housing types was $188,900 in August 2016, up just 4.7 percent from August 2015's median price of $180,800.

So if you're lucky enough to have your parents offer to sell you their home, it may be tempting to take them up on it. Still, buying a house is one of your biggest financial investments.

To avoid making mistakes first-time homebuyers make, let's weigh the pros and cons of buying a house from your parents.

The pros of buying a house from your parents

You already know the neighborhood

Of course, you may have grown up in the house you're buying. But even if you didn't, chances are you're familiar with the neighborhood since you grew up nearby.

That means you know the quality of the schools, how safe it is, and what amenities are available. Some of that you can find out online, but there's nothing like first-hand knowledge.

It can be loads cheaper.

Depending on your parents' motivations for selling, they may be willing to sell you the house at a significantly lower price than its market value. Around 30 percent of parents would sell their home to a child for less than its appraised value, according to a recent Bankrate.com report.

Of course, you'll still need to come up with a down payment and may need to get a mortgage. But a lower purchase price can mean big savings over the life of the loan.

Even if your parents aren't interested in undercutting the competition, buying a family home may still come with a discount since many sellers are willing to accept a lower offer from a relative.

You might not need a mortgage.

Mortgages aren't easy to come by these days. The average credit score for a conventional loan is 752, and you'll need a score of 760 or higher to qualify for the best rates, according to Bankrate.com.

Furthermore, the average down payment for a conventional loan is 20 percent. So if you're buying a $200,000 home, that's a $40,000 down payment.

If you're buying from your parents, they may be willing to finance the purchase or accept a smaller down payment. And since you probably have a good relationship with them, they may be more forgiving if you have a few dings on your credit report.

The cons of buying a house from your parents

You may feel obligated to them

If you're buying a house from your parents, it's likely because they want or need to sell it. And that means they may be counting on you to make the purchase.

Of course, you should only buy the house if you can afford it and it makes sense. But if your parents are in a difficult financial situation, you may feel like you have to buy the house to help them out.

It could cloud future family dynamics.

If buying a house from your parents is a good financial move, it could be great for your relationship. But if things go south, it could hurt your relationship.

For example, if you can't make the payments and need to sell the house, your parents may feel like they lost money on the deal. Or, if you make changes to the property that they don't approve of, it could create tension.

So before buying a house from your parents, be sure to have a frank discussion about your expectations, their expectations, and what would happen if things don't go as planned.

It could affect your taxes.

If you buy a house from your parents, you may have to pay capital gains taxes on any profits they made from the sale.

For example, let's say your parents paid $100,000 for the house 20 years ago, which is now worth $300,000. If they sell it to you for $200,000, they'll have to pay capital gains taxes on the $100,000 profit.

And if you then sell the house for $300,000, you'll have to pay capital gains taxes on the $100,000 profit. So be sure to factor in any potential taxes when buying a house from your parents.

Buying House from Parents: Things to do before you make an offer

Before you make an offer, it's important to do your homework. Here are a few things to keep in mind:

Get a professional home inspection.

Just because your parents take good care of their home doesn't mean there aren't any problems. A professional home inspector will be able to identify any potential issues like:

plumbing issues (save money on plumbing repairs)

Hiring a home inspector will cost you a few hundred dollars, but it's worth knowing what you're getting into. Check out things to consider when buying a new home for more info.

Get a professional appraisal.

Yes, it's your parent's house, and you know what it's worth. But a professional home appraisal will give you an unbiased opinion of the property's value.

This is important because if you're taking out a mortgage, the lender will only lend you money based on the appraised value of the property. So if the appraised value is lower than what your parents are asking, you'll need to make up the difference with cash.

A professional appraisal will cost you a few hundred dollars, but it's worth it to know what you're buying.

Get pre-approved for a mortgage.

If you're planning on getting a mortgage to finance the purchase, it's a good idea to get pre-approved before making an offer.

Pre-approval means that a lender has looked at your financial history and determined how much they're willing to lend you. This is helpful because it will give you an idea of how much house you can afford.

It's also helpful when making an offer because the seller will know that you're serious about buying the house.

So if you're thinking about buying a house from your parents, be sure to do your homework first. And if everything checks out, it could be a great investment for you and your family.

FAQs

Before you sign those papers, here are answers to some frequently asked questions about buying a house from your parents.

Q: Can I buy my parents' house below market value?

It depends. If you're buying the property as an investment or income property, the answer is no. But if you're buying the property as your primary residence, you may be able to buy it at a discount.

Q: How do I buy my parents' house?

The process is similar to buying any other property. You'll need to get a loan, come up with a down payment, and hire a real estate agent.

But there are a few key differences. For example, you may be able to negotiate a lower purchase price or get a loan with more favorable terms.

Q: How do I transfer my parents' house ownership to me?

The process of transferring ownership is called conveyancing. And there are a few different ways to do it. If you're buying the property with a mortgage.

But if you're paying cash for the property, you'll need to hire a solicitor or conveyancer to handle the transfer of ownership.

Conclusion

Buying a house is a great move with the housing market on the rebound. And if you're lucky enough to have your parents offer to sell you their home, it can be a great opportunity to get into the market.

But before you make an offer, be sure to do your homework. Get a professional home inspection, appraisal, and pre-approval for a mortgage. That way, you'll know what you're getting into and be able to make a smart investment.