How To Buy A Family Home

An alternative to purchasing property on the open market is to purchase family-owned property. Buying a family-owned home allows the buyer and the seller to directly set the purchase price between themselves.

How To Set Up The Transaction

In a family purchase buy out, relationship between parties doesn’t matter (as long as clearly explained), more emphasis is placed on how the transaction is structured for loan purpose. Following variations of how the transaction can play out, depending on down payment availability and closing costs.

How the numbers work:

If seller has no mortgage on the property

Sales price-$400,000

New mortgage-$320,000, (represents 80% loan to value mortgage)

Gift of equity- $80,000

Seller- net is less $80,000 plus any applicable pro-ration of property taxes

Buyer purchases the property and pays the closing costs of approximately $8000.

If buyer has no money at all for down payment or closing costs…

Sales price-$400,000

New mortgage taken out by buyer-$320,000 (represents 80% loan to value mortgage)

Gift of equity- $88,000 ($80,000 for the down payment, and additional $8,000 for the closing costs)

Seller- net is less $88,000 plus any applicable proration of property taxes, put another way, seller gives up the additional $8000 in closing costs for the benefit of the buyer

Buyer purchases the property without bringing any funds to the table.

If the seller has a mortgage on the property….

Sales price-$400,000

Seller mortgage loan payoff- $125,000

New mortgage taken out by buyer-$320,000, (represents 80% loan to value mortgage)

Gift of equity- $88,000 ($80,000 for the down payment, and additional $8000 for the closing costs)

Seller- net is less $88,000 less plus any applicable proration of property taxes as well as the $125,000 it took for paying off the mortgage

Buyer purchases the property and still does not bring any funds to the table despite the seller’s mortgage being paid off.

Tips on buying a home from family or another party

If mortgage financing is being used on the side of the buyer, the lender is going to view the transaction as a non-arm’s length. Non-arm’s length is a traditional sale between the buyer and seller with there is no relationship between the two parties. A family  property transfer is an arms length transaction because there is a relationship between the buyer and seller. Mortgage lender will require:

• purchase contract between the buyer and the seller for the purposes of ordering an appraisal
• motivation letter from the seller explaining why they’re willing to sell the property to to a family member rather than on the open market
• the bigger the loan the buyer takes to purchase the property, the larger amount of net proceeds are available for the benefit of the seller less any liens on title to the property such as mortgages
• the smaller the loan the buyer takes to purchase the property, the less amount of net proceeds are available for the benefit of the seller, buyer benefits with lower mortgage amount, subsequent lower monthly payment
• less than 20% equity using conventional financing will require a minimum down payment of 5% contribution from the buyer, using an FHA loan will require no minimum down payment from buyer, seller can full gift down payment

Want purchase a home from a a family member? Learn how the numbers play out by contacting scott today about your situation.