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Posted by Blog_Admin on November 1, 2022

Family & Finances: Is It A Good Idea To Buy Your Parent’s House

The housing market has been very happening, as we all have been observing it for the past two years. Unstable housing prices, ever-increasing mortgage rates, and supply issues are just to name a few. In these times, you might wonder: Is it a good idea to buy your parents house? Will it be beneficial? Is it worth it in the long run? Should you be mixing family and finances? You need to consider several advantages and risks before. 

If you are thinking to buy your parents home, here are all the things you need to know. 


1- Why It’s A Good Idea

     So, shall you buy your parents home before they pass away? It all depends on your specific situation. If you believe you can manage to afford it and your parents are open to selling it, it may be a smart idea.

  • It can help you financially as you can request a below-market rate from your parents. They may, however, be required to pay capital gains taxes on the disparity between the sale price and the property’s appraised worth. 
  • It can save you and your parents a lot of money by avoiding fees, commissions, contingencies, inheritance tax, and other expenses.
  • You can avoid making a down payment.
  • In the event you are not able to qualify for a mortgage, you may be able to request your parents to act as the lender.

2- Downsides To It

        Before buying your parent’s house, consider the following drawbacks/risks.

  • Gifted down payment funds may be taxed by your parents. Secondly, if you do not meet particular requirements, your parents may be required to gift at least 15% of the equity in their property.
  • Your parents are at risk of being ineligible for government benefits since they received a significant sum of money as a result of selling their home.
  • If you buy the property while your parents are still alive, you may be required to pay capital gains taxes on the sale.

3- Steps To Buy Your Parents Home

Below are some important steps mentioned to buy your parents house.

  • Cooperatively Set A Price

  • Get Assistance From The Right Professionals

  • Applying For A Mortgage

  • Proceed Towards The Closing

i- Cooperatively Set A Price

A child could want to purchase the house for less than it would sell for on the marketplace. However, since they require cash for retirement, your parents might prefer to sell at market price. In that case, you can use different tools to set a realistic price that both parties will mutually agree to. You can either opt for a comparative market analysis or get a home appraisal report to assess the market value of your parent’s home.


ii- Get Assistance From The Right Professionals 

By not using a real estate agent to sell their house to you, your parents may save money on the commission that real estate agents charge. But doing so means you can miss out on advice from a real estate expert regarding required documentation and legalities. Your real estate agent/professionals will take care of the following things on your behalf:

  • Prepare a purchase contract so that no legal issues can occur later. 
  • Prepare escrow instructions with the help of an escrow officer or lawyer.
  • Prevent any unfavorable tax consequences for your money as well as your parents finances (a tax expert).

iii- Applying For A Mortgage

You must apply for a home loan if you lack the capital necessary to purchase a home. Ensure that your lender is aware that you are buying a home from your parents. Most first-time home buyers opt for FHA loans as they require a 3.5% down payment with a credit score of 580. 


Your parents could be ready to consider a “seller carryback” if you are rejected for a mortgage. Your parents can serve as the lender, and you can make payments to them for a predetermined period of time rather than applying for a house loan through a traditional lender.


iv- Proceed Towards The Closing

You’ll need to arrange a closing in order to complete the deal. You can do it with an attorney, a bank, or a title business. To ensure that all the terms are accurate, review the closing documents carefully. A closing disclosure will be sent to you if you get a mortgage three business days before closing. Make any required changes before signing the documents.


4- Important Details To Know!

Below are some important details mentioned you should know before buying your parents house.

  • What Happens To The Inheritance Tax?

  • What Will Be My Tax Implications?

  • Home Inspection Is Important Regardless 

  • “The Gift Of Equity”: What Should I Know?

  • What Is Life Estate?

i- What Happens To The Inheritance Tax?

A deceased person’s estate is taxed by an inheritance tax. The tax is levied on the property’s value that the recipients inherit. If you buy your parents house when they are still alive, you may be able to skip paying inheritance tax entirely. This is due to the property being deemed a personal asset rather than part of the estate. You should bear in mind that if you sell the home in the future, you may still be required to pay capital gains taxes.


ii- What Will Be My Tax Implications?

You might have to pay capital gains taxes on the sale if you buy the house while they’re still alive. For instance, if the home is worth $400,000 and you pay $350,000 for it, that indicates $50,000 has been gifted. But if you hold off until after their passing, you might be able to completely dodge these taxes.


If a principal residence is owned by a person and the sale profits are utilized to buy another primary residence within 2 years of the sale, there is no tax due on the sale. The rollover clause is what we refer to as. You must fulfill specific requirements, such as residing in the home for a minimum of two of the previous five years, in order to benefit from this provision.


iii- Home Inspection Is Important Regardless 

An inspection of the house is always a good idea before buying a house so you are aware of any hidden problems. A home inspection’s primary goal is to provide you with a thorough examination of all the house’s functional components. It is especially crucial for you to be aware of what is happening from the house’s foundation to its roof if your parents are older or disabled because they may not have completed routine maintenance.


iv- “The Gift Of Equity”: What Should I Know?

Some parents decide to leave their children equity in their home whilst they are alive. The term “equity” refers to the gap between the property’s market value and total debt. As a down payment on the home, the parents agree to sign over a portion or the entire equity value to their kids.


v- What Is Life Estate?

There is a life estate when there are two joint legal owners of a property. The resident retains ownership of the property until they pass away, at which point it goes to the second owner. Parents and children are frequently the joint owners. This risk is removed by establishing a life estate agreement, which safeguards your parents and ensures that they can live in the home until they pass away.


5- Getting A Mortgage Made Simpler With Brokerly

Now that you’ve decided to buy your parents house, you’re probably looking to secure the best mortgage plan out there. For that, you will need expert guidance from a loan officer in your area. There are several legalities that need to be taken care of, as buying your parents house comes with its own set of technicalities and rules. To simplify this process, Brokerly connect you with the best loan officers who will simplify the mortgage process for you and get you the best mortgage plan.  

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