Family Dinner

As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.

Buying a home can be a tricky, expensive and stressful process. In some situations, you may consider buying a home from a family member or friend. After all, you’d likely get a lower price, go through a quicker process and potentially even have access to owner financing, and wouldn’t it be much easier to deal with someone you already have a great relationship with? You wouldn’t even need a real estate agent!

Whoa. Slow down there.

Buying a home from someone you know might be a great idea, but there are a number of things you need to know before you can sign on the dotted line. Before you’re ready to move into your new home, let’s go through the basics to help you prepare.

What Is an Arm’s Length Transaction?

Real estate transactions can be broken down into two broad categories: arm’s length transactions and non-arm’s-length transactions. An arm’s length transaction is a transaction between two parties who don’t have a relationship with one another – whether that’s a family tie, a business connection, etc. Each party is confidently able to act in their own self-interest. For example, when you buy a house from a stranger, it’s considered an arm’s length transaction.

What Is a Non-Arm’s-Length Transaction?

A non-arm’s-length transaction is a deal with someone you have a relationship with, whether that’s professional or personal. This can include family members, friends, business partners, etc. This type of relationship between buyers and sellers is known as an identity of interest.

When a relationship like this exists, there is a greater chance that one party could manipulate the other party in some way, or both parties could work together to try to cheat the fair market price of the home. This is an example of mortgage fraud.

Example of a Shady Non-Arm’s-Length Transaction

Let’s say that Mary wants to buy a house, and her uncle Sam says he’ll sell his house to her for $200,000. In reality, though, the house is only worth $150,000. Sam – who knows that Mary trusts him – is trying to use his relationship with his niece to inflate the price of the house and get more money. This behavior can be considered mortgage fraud.

Luckily for Mary, there are entire teams within mortgage companies and governmental organizations whose job it is to sift through these types of transactions looking for shady situations. One way they do this is by requiring an arm’s-length principle of transfer pricing. What is that? We’re glad you asked.

What Is an Arm’s-Length Principle of Transfer Pricing?

The arm’s-length principle of transfer pricing requires that the amount charged for a house is the same for transactions between strangers as it is for transactions between those with personal ties. This protects one or more parties from being manipulated by an inflated market value.

Are Non-Arm’s-Length Transactions Illegal?

Non-arm’s-length transactions are legal, but because of their potential for fraudulent situations, they are treated with a higher scrutiny than an arm’s-length transaction. There are more government and individual lender guidelines to follow when trying to get a mortgage for a home. There are a few things lenders want to guard against in family deals, and some of them are for your own benefit.

Because the water can be so easily muddied with family or friend transactions, lenders want to ensure both the buyer and seller are acting in their own self-interest (not under any duress), are agreeing on a price that is close to the market value and aren’t engaging in mortgage fraud, including misrepresentation, straw buyers, inflated prices, etc.

In a short sale, for example, an arm’s length affidavit must be signed to protect against a family member buying the home but allowing the original owner to stay in the home for a greatly reduced mortgage cost.

Should You Buy a House from Family or Friends?

There are a lot of potential benefits to buying a home from a friend or relative, but mixing home sales and family can be a sticky business. Here are a few other things to consider before purchasing a house from family or friends.

Added Restrictions

With a non-arm’s-length transaction, you’re going to risk running into more obstacles with getting a loan because of all the added restrictions, and you may be subject to extra taxes because the IRS will be watching closely to make sure a fair market value – and interest amount – is paid for the home. If you buy the home at a cheaper price and then sell it within a few years, you may be subject to capital gains taxes as well.

Jealousy

In some situations, other family members or friends who aren’t directly involved with the transaction can become jealous of the situation (for example, if you buy a house that’s been in the family for generations). While this doesn’t have a direct impact on the transaction, it can cause some kinks in your relationships. So be prepared and aware of the overall perception when purchasing a home from a family member or friend.

Shift in Financial Situation

The next potential pitfall is a sudden shift in the seller’s financial situation, which could move them to ask you for more money on the purchase, especially if they provided the loan for you instead of a mortgage lender. While you likely have a group of well-meaning people in your life, money is something that can make many people turn mean fast.

Pro Tips

These can be some touchy subjects, but if you’re buying a home, you have to know everything about it, whether you know and trust the seller or not. Use this checklist before moving forward with the purchase:

  • Make sure the family member is current with their mortgage payments, because it could impact your mortgage approval if they’re not.
  • Work with a title company to protect yourself from any other liens that might be on the property. Many title companies have for sale by owner (FSBO) teams that can help you a lot when you’re not using a real estate agent.
  • Get legal advice. This isn’t because you don’t trust your friend or relative, but because you aren’t well-versed in the legal aspects of purchasing a home. An attorney can help you with all the paperwork and make sure you don’t inadvertently commit mortgage fraud.

Buying a home from a friend or relative can seem like a great way to simplify moving into a new home – and it can be. But it’s important to understand how the process works and the potential risks involved. Our Home Loan Experts are ready to help you through the home buying process. If you have questions or comments about any of this, let us know in the comments!

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This Post Has 303 Comments

  1. Hello,

    My husbands brother just offered to sell us his house that we are currently renting in. Online records state the house was sold in December 2006 for $170,000. The house is estimated at $118,000 now. He told us that the mortgage isn’t paid off and that he gives an approx. Mortgage payment of $950.00. He told us that he would sell us the house if we gave him $60,000 for it. With all of that being said are we being cheated or is he actually trying to save us money if we buy his home. Are there contracts, specific paperwork to keep in mind if we do go ahead and buy the house from him. Please help.

    1. Hi Brenda:

      Online estimates obviously aren’t official, but if it’s worth anywhere near $118,000 and he’s offering to sell it to you for $60,000, it sounds like he might just be trying to get the mortgage balance back and pay it off. If the house is in good condition and you’re interested, why not? It sounds like a deal. Moreover, because he’s family, when you go to get a mortgage, any discount given on the sale price vs. what he could actually get on the market for the home can be considered a gift of equity and be used toward your down payment and closing costs. We would just need to see a letter that says, among other things, that he doesn’t expect to be paid back at any point. If you want to get started online, you can go over your options with Rocket Mortgage or give us a call at (888) 980-6716 to have one of our Home Loan Experts go over your situation. Hope this helps!

  2. My mother has her house which is paid up. She now is moving to a retirement community and wants to sell the house and slit the profit between my sister and I. I am interested in buying out my sisters half and keep the house as an investment and rent it. Pros and cons?

    1. Hi Kevin:

      Assuming the house is completely paid off, we can help you with this. Seeing as it’s an investment property, that would be a conventional loan and there really isn’t anything special about the financing of a non-arm’s-length transaction. I can tell you that the minimum down payment for any investment property would be 15% or 20% depending on your median FICO® score. I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716 when you’re ready to get started. Have a good day!

  3. I am currently living in mom’s house, which has a defaulted mortgage; however, the home is NOT foreclosed upon. We are working through a lawyer to come up with a solution to satisfy the loan and keep the house before it goes into foreclosure. The payoff amount for the default is approximately $15,000 less the appraised value. I would like to purchase the home from my mom, which in essence could satisfy the payoff amount. What is the likelihood a lender would loan me the money to buy the home?

    1. Hi Rashad:

      If you buy the house, your mom can’t continue to live there. That would be the restriction that the major mortgage investors (Fannie Mae, Freddie Mac, FHA, etc.) have. If she won’t be living there, I suggest you give us a call at (888) 980-6716 and we can go over your options. If that doesn’t work, I don’t know if she’s past the point where you can do a modification to avoid foreclosure. I would talk to the servicer who you make the payments to. Good luck!

  4. In January we moved into a house as a rent to own. The past 3 month have been horrible. Constantly calling 2 weeks before rent is due. Many times a day til one of us answer. We pay the money to her mom since they moved out of state and don’t trust anyone with their new address. As of today we told her we are going to move. She said she was going to send out a certified eviction letter. Because we didn’t answer the phone. So we told her to do what she wants. Then goes back on saying it. Well we told her we are going to move anyways we are done with her….long story short. She never sent us a contract. Only via facebook messenger do we have it in writing that we were doing rent to own. But she said she is giving us 24 hour notice that her mom will be here to check on the house in place of her and her husband. And that the next few weeks buyers will be coming with her mom to see the house and we need to let them in. Can she send her mom in place of her? Do I have to let them in? I stay home with 2 year old all day. Shouldnt whoever owns the house be the ones who show buyers? Dosent she have to cone back here to evict us? Also she lied to her bank about renting out the house. Told them I was her cousin living here for free. Both are lies. Said I was watching the house while she was away.

    1. I think the best thing to do would be to talk to a lawyer, but things that were said on Facebook may or may not have the force of an actual contract. I think you need to get a lawyer involved to spin you up on eviction laws in the area.

  5. Hi! My fiance and I live in his mom’s house and we have been paying the mortgage and all of the associated bills for 5 years. We want to purchase the house from her and she said that with the difference of what she owes and what she’s selling it to us for, she will cover our down payment, a new roof and new siding since the house needs it. Is that possible? Just want to make sure we know if it’s legal to do that.

    1. Hi Lydia:

      As long as you aren’t considering getting an FHA loan, your mother-in-law can use the money from the sale to finance your down payment. However, having a family member gift you a large amount of money for a down payment could raise a red flag in the home buying process, so you’ll need to provide a gift letter and evidence of the transfer of funds to be able to use the money for your down payment. You can read more about down payment gifts here. Covering a new roof and siding would be a separate transaction and wouldn’t need any documentation or letter. One thing to note is that if you want to refinance and get rid of your mortgage insurance, you’ll have to get an appraisal with the new roof, since the new roof can increase the value of your home and change the amount of equity needed to remove the mortgage insurance. I hope this helps!

      1. Sounds like you’re referring to a gift of equity transaction, if that is the case then yes, most of what you said is true.
        A gift of Equity, for example, is when a 400k house is sold for 300k, basically gifting you 100k of equity. In most cases your mortgage company will apply that 100k of equity as a down payment, allowing you to finance the entire 300k without private mortgage insurance. Indirectly…she is paying your down payment.
        As for the roof and siding, my only guess is that she might think that by paying your down payment indirectly, you can use the money you were going to use as a down payment to pay for the siding and roof.

        1. Yes, that’s what I was referring to. And she could use the money she’s saving on the down payment to put toward a new roof. Thanks, Colin!

  6. My husband and I are buying his grandmas house for 60,000 from his mom and aunt. Its valued online for 98,000. We have been approved for a loan of 120,000. We are planning on using extra cash for fixing up and rennovations. The house is paid off, and no liens. Will his mom or aunt have to pay any more taxes than the 30,000 each gets? Also, do we need a lawyer, or can we just sign a contract?

    1. Hi Karen:

      I want to make sure to note here that you can’t use the extra amount of money from your loan to finance renovations. If you’re planning on paying $60,000 for the house, you’ll only use $60,000 of that loan. Unless you’re planning on using an FHA 203k, which would allow you to use the money from the loan for both home improvement as well as home purchase. At this time, Quicken Loans does not offer FHA 203k loans. As for your tax question, I would talk to a tax expert, as we primarily deal with home loans. Lastly, I would suggest instead of a contact, you seek a quickclaim deed. While you might not need a lawyer with a family transaction, it never hurts to have an unbiased professional working to protect the interests of your family members and yourself. But ultimately, it’s up to your discretion. I hope this helps!

  7. A family member owns a home that is paid off. Current value is about 610k. Said family member wants to help another family member out and sell it for about what they put into it which is around 400k.

    What are some possible ways of doing this?

    1. Hi James:

      This arrangement is called a gift of equity and the difference between the actual value of the home and the sale price becomes transferred equity to the buyer. It can be used for the down payment and closing costs. The seller just has to sign something saying that the buyer doesn’t have to pay them back. There’s more information on gift letters here. Hope this helps!

  8. My parents own the home we have been renting and we are considering purchasing it from them. The estimated market value of the home is $250k. We are thinking about getting a mortgage for $150k, with $50k going toward needed repairs and the rest to my parents. Is this possible? What kinds of issues could we run into? What are some possible options for making this work? Also, would we need to have a down payment as first time homeowners?

    1. Hi Melody:

      You would need a down payment as first-time home buyers unless you get a USDA loan (in eligible rural areas) or a VA loan. One of the only loan programs out there that provides a mortgage for both buying a house and renovations is the FHA 203K loan. Unfortunately, we don’t offer that at this time. I do wish you luck.

  9. My brother purchased a home from my now ex husband. He paid it off completely and has the receipt stating paid in full. He didn’t change the name on the deed and isn’t living in the house at this time, but has continued to keep up the grass and pay taxes on the property. Now my ex went to the courthouse and found out the deed was still in his name, broke into the house changed the locks and gave my brother a month to remove his personal belongings. My brother in turn placed a padlock on the home which the ex then removed. Who legally owns this home?

  10. A corporation is buying a house from my wife. I am a major stockholder in the corporation
    The sales price is undervalued appraisal by lenders chosen appraiser $710,000arv
    sales price $325,000
    Private lender is funding purchase price plus $120,000 rehab money. The agreement had been worked out between private lender, my wife and corporation
    Everything is alright with the corporation, my wife and the lender
    at last minute title company wants my wife to submit a family transaction questionnaire why what does it matter to them this could cause trouble Im not happy

    1. Good evening, Tom. I’m going to have one of our Home Loan Experts reach out to get some more data. They’ll be able to point you in the right direction.

    2. Hi Tom:

      If your major stakeholder and the house is being bought from your wife, it could be considered a non-arms length transaction and those have different requirements. They’re doing their due diligence. I’m sorry. You’ll have to go through the process. I would talk to the lender about next steps.

  11. My grandma took a loan out on her house about 10 years ago, and she currently owes about $9,200 left. She is wanting to give me the house so she can downsize. Is it better for me to give her the money to pay off her loan, then her gift me the house? Or me buy the house directly? It is written in her will that the house goes to me, but she has debt and we are worried they will go after the estate. What tips do you have to help with this process, and to ensure that I receive the house with the minimum of taxes and fees?

    1. Hi Chevelle:

      Giving her the money and then doing a quitclaim deed to get the house in your name is certainly one option. You would just stipulate that she gets the $9,200 or whatever the final amount is when you do the quitclaim. You would want to make sure she contacts her mortgage servicer (the people she pays the bill to) in order to make sure that the payoff goes properly. However, if you do that, you don’t receive any tax benefit. If you pay on the mortgage, then you can deduct any mortgage interest from your taxes if you itemize. You could also assume the current loan from your grandmother if you wanted in order to just take over the payments. You would have to credit qualify and do it with the permission of her lender/servicer, but it can be done.

      You can try getting a mortgage for that amount to just buy the house, but with the closing costs, it may not make sense to get a loan quite that small. You might have to get a personal loan. If that was the case, our friends at RocketLoans could help you. If you want, you can also talk to one of our Home Loan Experts at (888) 980-6716. We could go over whichever option might be best. Hope this helps!

  12. Hello,
    My husbands parents are wanting to down size and we are looking to buy there home. We have been approved for an fha home loan due to where we live. What do we need to do to start I would like as much information as possible to be prepared when going to the table on this deal. If you could help us that would be great.

    1. Hi Jessica:

      The good news is it sounds like you’re going to be buying your parents’ primary residence. Because of that, you’re able to put just 3.5% down if you want to. Also, if your parents are giving you a family discount on the sales price, the difference between the appraisal and your purchase price can be used toward your down payment. It’s called the gift of equity. They just have to write a letter gifting it to you. So you’ll have that option. There’s not that much else you need to know. You can’t both occupy the same residence, but that won’t be an issue if they move out.

      I know you said you’ve already been approved, but if you would like to go over your options and see what we can do for you, you can do so online through Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. Thanks!

  13. I’m planning to purchase the house my wife and I are currently renting from her brother. Is there a minimum credit Score I must have in order to purchase it?? And also he is willing to give us a gift of equity for the down payment and closing cost. How should we prepare ourself’s??

    P.s. Thank you in advance.

    1. Hi Ray:

      The minimum credit score depends on the type of loan you’re getting. For an FHA loan, the absolute minimum credit score given other good qualifying factors is 580 median FICO. The VA doesn’t mandate a minimum credit score, but lenders can set their own and we require a 620 median FICO. On a conventional or USDA loan, the required median FICO is 620. Beyond that, if he wants to give you a gift of equity, you have to have a gift letter. If you go with an FHA loan, you may need a minimum gift of equity of 15% because it’s not his primary residence.

      I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716. They’ll be able to give you detailed information. Have a great day!

      Thanks,
      Kevin

  14. My mom passed away and left her 4 children the house. The will says to sell it and split the proceeds. My brother and i would like to buy the house. Could we just get a loan for the amount of what we owe my other two siblings and we just do a quit claim?

    1. Hi Carolyn:

      I’m not sure how that works because you already have a claim to the title. We might be able to help you do a cash-out refinance. Then you would pay off the other two. I’m going to recommend you speak to one of our Home Loan Experts at (888) 980-6716.

      Thanks,
      Kevin

  15. Kevin:

    My mother is 88 years old and lives alone and has a will leaving the home to my sister and I upon death. Due to her age I am concerned eventually she could need to go into assisted living or a nursery home. I am concerned about the house being an asset. My sister and I are wondering if it would be smart to purchase the house from her? We want to keep the home after her death. Can you provide any advice?

    Thank you

    1. That can certainly be an option, Veronica. In terms of whether it’s a good one, unfortunately, I’m not an expert in Medicare law and you should probably talk to an elder law attorney who is. If you buy it from her, then she has the assets from the sale, so I’m not sure how that works.

      Thanks,
      Kevin

  16. I am buying a home from my father in law been here for about 7 years now I am the one paying the bank and taxes but I really would love to get it in my name before something happens and the family steps in my credit isn’t so great so I don’t think I can get a loan is there anything I can do about this please help thank you i don’t owe much more on the house maybe around 10000

    1. Hi Clayton:

      It may not make sense to get a mortgage in the amount of $10,000. With a loan amount that small, it’s hard to make it makes sense once closing costs are factored in. You could look into a personal loan depending on your credit through our friends at RocketLoans. The other option is for him to quitclaim the property to you and letting you just keep making payments on the loan until it’s paid off. You can choose to pay him something for the property this way while still paying on the current loan. If you did this, you would just have to work with the bank to make sure you could officially assume the loan first. That way, they wouldn’t call it due upon the deed transfer.

      Thanks,
      Kevin Graham

      1. Kevin –

        Is that not against most loan terms? When a deed transfer occurs a bank can make a demand clause.. right?

        1. You are correct. We misspoke in that initial comment. I’ve edited it so the right information is there. Thanks for speaking up!

  17. I was lead to believe I was renting to buy a home from family I’ve spent over 30000 and now apparently the original owner which wasn’t paying mortgage that’s why I took over is now evicting me wife 4 kids I paid for thousands of dollars in repairs fixing the home is there some law or something that either gets my money back or house cuz I dnt see how them lying and me paying the mortgage so they can kick us out is fair is there anything that can help me

    1. Hi Richard:

      In terms of staying in your home, I would contact a local attorney. Different states and municipalities have differing laws on the books. It’s a long shot, but you could also try reaching out to the actual lender and see if they can do anything to work with you. I would also look into civil options to possibly sue the owner of the house for breaching your agreement, particularly if you have written statements of responsibility.

      Thanks,
      Kevin Graham

  18. My father and uncle owned the famiy home. My uncle died and his share of the house went to his sons. My father died a few years later and he willed his property to me. My cousins no longer wants the property and have asked me to buy them out. They are willing to do a quit deed for $1.00. I have to pay them half of the house value. Do I have to report to the IRS what I paid them?

    1. Hi Mike:

      I’m not a tax expert and I would advise you to talk to one. However, I think the tax burden would be on them for any money they made from the sale. As I said though, talk to a tax person for the best advice.

      Thanks,
      Kevin Graham

  19. You told us about lot of benefits to buying a home from a friend or relative but according to me mixing home sales and family can be a sticky business. Here are a few other things we should consider before purchasing a house from family or friends. This isn’t because you don’t trust your friend or relative, but because we aren’t well-versed in the legal aspects of purchasing a home.
    we buy houses

    1. Hey Alan! Thanks for your comment. While we did list a few benefits of buying a home from a friend or relative, we did mention a few things to consider before going through the process. Like you said, it can be a tricky situation. There might be obstacles with getting a loan, the possibility of family strife or even a sudden shift in the seller’s financial situation. That’s why we listed our “pro tips” at the bottom to help you prepare, should you purchase the home from a close one. These include making sure the family member is current with their mortgage payments, working with a title company and getting legal advice to help with all the paperwork. Hope this provides some clarity! – Allison

  20. Hi-
    My spouse and I nearing the time where will be shopping for a mortgage in order to buy a home from a relative. We are getting the house at a good price (possibly half the market value for the area). At this time, we only have a verbal agreement on the price. We know the relative has taken out a loan against the house for the price that was verbally agreed upon. The relative plans to pay off the lien they have on the house with the sale to us. What sorts of things should we prepare for when shopping for a mortgage in this non-arms length transaction?

    1. Hi:

      It’s possible that you would have to make a higher down payment with certain types of loans since it’s a non-arm’s-length transaction. That being said, since you’re buying from a relative, the discount on the sales price can also be given as a gift of equity with the proper gift letter documentation. In this scenario, the discount you are getting on the sale can be counted toward the down payment. You’re getting free equity. One of our Home Loan Experts could go over this with you and talk about the requirements in greater detail at (888) 980-6716, but those are the sorts of things you should know going into the transaction.

      Thanks,
      Kevin Graham

  21. My mother -in-law passed in Jan. My husband is the power of attorney . There is no estate, it is a revolving trust. We are trying to sell the house to our daughter. She is pre- approved thru a local bank. We had it appraised, but we want to ask a smaller amount for it, needs repairs and updated. My husbands sister is only in the will as a successor if my husband dies. We hired an attorney but she will not sign the asking price, she wants more. Where do we go from here. We will not sell to anyone else and we will not sell for more than it’s worth. Any suggestions? Is there any way besides an arm length transaction without her consent?

    1. Hi Pam:

      I’m very sorry to hear about your mother-in-law. There are a couple of things that come to mind here. For starters, the property itself may have to be out of the trust before it can be transferred to anyone else. This is where you going to have to rely on your attorney, because I’m not a lawyer. If your husband has control of the estate and it only passes to his sister if he dies, I’m having a hard time seeing where she comes into the picture here. That said, I’m not an expert in local law. As far as not selling for more than it’s worth, it’s worth whatever the appraiser says it’s worth. Also, as far as arm’s length vs. non-arm’s-length transactions, I don’t think it would matter in this case. If for some reason you needed his sister’s approval, you would still need it no matter who you sold to. I know that’s about as clear as mud, but I would talk to your attorney and those are the issues you have to think about.

      Thanks,
      Kevin Graham

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