Buying a home from a family member is a non-arm’s length real estate deal where the buyer and seller have an existing personal relationship, which can mean a better price but comes with special lending and tax rules.
A family home sale happens when you buy property from a parent, sibling, grandparent, or another relative instead of going through the open market. In the mortgage world, this is known as a non-arm’s length transaction because you and the seller already have a personal connection. That connection changes the rules. In an arm’s length deal, the buyer and seller don’t know each other and are both trying to get the best price for themselves. When family is involved, lenders and the IRS assume the sale price might not match what the home would sell for on the open market.
Why does that matter to you? Because most mortgage programs have stricter guidelines for these deals. You can still get a loan, but you’ll face more paperwork and a closer look at the details. The Consumer Financial Protection Bureau notes that home buyers should always understand their closing costs and loan terms before signing anything, and that goes double when emotions are part of the deal.
The good news is that buying from family can save you real money. You might skip the real estate agent commissions (usually 5% to 6% of the sale price), and you probably already know the home’s quirks and history. A colleague of mine mentioned recently that her sister was able to buy their parents’ home in a Louisville suburb without a single bidding war, which is almost unheard of in today’s market. That kind of stress reduction has real value.
Still, you can’t treat this like a handshake deal. Even if your mom says “just take the house,” there’s a legal and financial process you have to follow. Let’s walk through it.
The idea behind arm’s length versus non-arm’s length is pretty simple. In a normal home sale, the buyer wants the lowest price and the seller wants the highest. That tug-of-war usually keeps the sale price close to fair market value. But when you’re buying your dad’s house, he might cut you a deal just because he loves you. Lenders worry about that.
Their concern boils down to fraud risk. If someone sells a home to a relative for way more than it’s worth, the buyer could walk away from the mortgage and the lender loses money on a house that isn’t worth the loan balance. On the flip side, if the price is too low, the IRS might see the gap as a taxable gift. Both sides need to check the details carefully.
When you apply for a mortgage with AmeriSave or any lender, you’ll need to disclose your connection to the seller right away. Trying to hide the relationship can be treated as mortgage fraud, which carries serious penalties. Fannie Mae guidelines do allow these transactions for primary residences, but they won’t approve them for investment properties. Freddie Mac has similar rules. So if you’re thinking about buying a relative’s rental property as an investment, you’ll likely need cash or a different lending path.
One thing that catches people off guard is the appraisal. Even though you and the seller have already agreed on a price, the lender will order a full in-person appraisal. Appraisal waivers and remote appraisals aren’t an option for non-arm’s length deals. The lender needs to confirm that the sale price makes sense compared to similar homes that have sold recently in your area.
Here’s where it gets interesting. If the appraisal comes in higher than the purchase price, that gap can actually work in your favor. The difference between the appraised value and the sale price can count as a gift of equity, which you may be able to use toward your down payment. More on that in a minute.
The process isn’t wildly different from buying any other home, but there are a few extra steps you can’t skip. Think of it this way: you’re adding legal structure to what might feel like a casual family agreement.
Before you talk price with your family member, find out how much you can borrow. Getting preapproved through AmeriSave or another lender shows you what loan amount you can handle and what your monthly payments might look like. Tell the lender upfront that you’re buying from a relative. This is not optional, and most lenders will ask you to fill out an identity of interest form.
This is where family sales can get awkward. You need to cover the sale price, any gift of equity, the current mortgage situation on the home, who handles repairs before closing, and when the seller will move out. If your parent needs to stay in the home for a few months after closing, get that in writing. A lot of family disagreements around real estate happen because people assumed things would just work out. They usually don’t work out without a plan.
Something I’ve heard from colleagues who work with home buyers: the conversations about money between family members are harder than people expect. You might feel weird asking your parents what they still owe on the mortgage, but that number matters. If they owe more than you’re planning to pay, the deal can’t happen without someone covering the gap. Knowing the full financial picture upfront saves everyone from an uncomfortable surprise at closing.
You need a professional appraisal to find the home’s fair market value. Your lender will order this, and you can’t use a relative or family friend as the appraiser. The appraisal protects both sides. It tells the lender the loan amount is reasonable, and it gives you and your family member a neutral number to anchor your price around.
Can you buy a home from a family member without an agent? Sure. Should you do it without a lawyer? Probably not. A real estate attorney can draft the purchase agreement, make sure the title is clean, handle the gift of equity paperwork, and keep both parties honest. Legal fees for a straightforward family sale usually run between $500 and $1,500, which is a lot less than the cost of a family feud.
Even when you trust the seller completely, you still want a title search to make sure there are no liens, unpaid taxes, or other surprises on the property. Title insurance gives you protection if something shows up later. From there, the closing process works the same as any other home purchase. You sign the final documents, the title transfers to your name, and the lender funds the loan. The CFPB says closing costs usually fall between 2% and 5% of the purchase price, so budget for that on top of your down payment.
A gift of equity is one of the biggest advantages of buying from family. It works like this: if your parents’ home appraises for $300,000 and they sell it to you for $250,000, the $50,000 difference is a gift of equity. That money can count toward your down payment and closing costs, depending on the loan program.
Most lenders will accept a gift of equity with the right paperwork. You’ll need a formal gift letter that says the seller is giving you the equity discount and that no repayment is expected. The letter has to include the property address, the appraised value, the sale price, and the relationship between buyer and seller.
If the gift of equity gets you to 20% or more in equity right from the start, you can skip private mortgage insurance, which saves you money every month. For a lot of first-time home buyers, that kind of built-in equity is a game changer. It’s the reason many families choose to sell below market value in the first place.
Keep in mind that the gift of equity has tax consequences for the seller. The IRS treats it like any other gift, so if the equity discount is bigger than the annual exclusion amount, the seller will need to file a gift tax return. We’ll cover the tax side in the next section.
AmeriSave can walk you through the gift of equity process and help you figure out how much you’ll actually need to bring to the closing table.
The gift letter is one of those documents that feels like a formality until you realize your loan can’t close without it. Your lender will want the letter to state clearly that the equity discount is a gift, not a loan. It should include the names and relationship of buyer and seller, the property address, the appraised value and the actual sale price, and a line confirming that no repayment is expected. Both the buyer and seller need to sign it.
Some lenders have their own gift letter templates. Others will accept a letter your attorney drafts. Either way, don’t wait until the last week before closing to handle this. Getting the paperwork squared away early keeps the underwriting process moving and avoids those stressful last-minute delays that can throw off your closing date.
The tax side of a family home sale can get complicated fast, and it’s where a lot of people get tripped up. The IRS pays attention to sales between relatives because they want to make sure nobody is dodging taxes through sweetheart deals.
The annual gift tax exclusion is $19,000 per person, according to the IRS. That means each parent can give each child up to $19,000 without needing to file a gift tax return. A married couple selling together can give up to $38,000 to a single buyer. But if your gift of equity is $50,000 and the sellers are married, they’d go over by $12,000, which means they’d need to report it on IRS Form 709.
Here’s the thing that calms most people down: reporting a gift isn’t the same as paying a gift tax. The lifetime gift tax exemption is $15 million per person. Until someone’s total lifetime gifts go past that number, there’s no actual tax bill. Filing the form just helps the IRS keep track. For most families, a gift of equity won’t cost anyone a dime in taxes.
Capital gains tax is the other piece to watch. If the seller has lived in the home as their primary residence for at least two of the last five years, they can exclude up to $250,000 in gains ($500,000 for married couples) from their taxable income. That’s a big deal for parents who bought their home decades ago when prices were a fraction of today’s values.
One more thing: when you buy below market value, your cost basis in the home is the price you actually paid, not the appraised value. So if you eventually sell the house years later, you could face a bigger capital gains tax bill because your basis started lower. A tax advisor who knows real estate can help you plan for that.
Property taxes are another area to watch. In many states, transferring ownership triggers a reassessment of the home’s taxable value. If your parents bought the house decades ago and have been paying taxes on a much lower assessed value, you might see a jump in your property tax bill after the sale closes. Some states have rules that limit reassessment for transfers between parents and children, but those rules vary a lot by location. Ask your attorney or tax advisor whether your state has any protections that might apply to your situation.
Not every loan program handles non-arm’s length deals the same way. The type of loan you choose can make a real difference in how much cash you need upfront and how much hassle you’ll face during underwriting.
Conventional loans backed by Fannie Mae and Freddie Mac are usually the easiest path for buying from a family member. There’s no special down payment penalty for non-arm’s length purchases when you’re buying a primary residence. First-time home buyers who earn at or below 80% of their area’s median income can sometimes put down as little as 3%. Everyone else usually needs at least 5%. The big restriction is that you can’t use a conventional loan for a non-arm’s length investment property, and delayed financing (paying cash then immediately doing a cash-out refinance) isn’t allowed either.
One advantage of going conventional: the underwriting process tends to be faster and less complicated than FHA for family purchases. You’ll still need a full appraisal, but the lender won’t make you jump through the identity of interest hoops that FHA requires. If you have solid credit and enough money for the down payment, a conventional loan through AmeriSave might be the smoothest option.
FHA calls family sales “identity of interest” transactions, and the rules are tighter. The standard FHA down payment of 3.5% jumps to 15% for identity of interest purchases. That’s a big difference on a $300,000 home: $10,500 versus $45,000.
But FHA has exceptions that can bring you back to the 3.5% minimum. The most common one: if you’re buying a family member’s primary residence, the 15% rule doesn’t apply. You can also keep the lower down payment if you’ve been renting the property for at least six months, or if the sale is part of an employer relocation.
Worth noting: some lenders won’t do FHA non-arm’s length loans at all because of the extra underwriting work. If one lender turns you down, shop around. AmeriSave can help you look at whether a conventional or FHA path makes more sense for your situation.
VA loan guidelines don’t specifically restrict non-arm’s length transactions, which is good news for eligible veterans and service members. Individual VA lenders may still have their own rules, though, so check before you assume everything will go smoothly. USDA loans also allow these purchases. Their rural development program mainly asks that you disclose the relationship to the appraiser and document any gift of equity properly.
Let’s say a family in the Midwest wants to keep their parents’ home in the family. The home appraises for $320,000, and the parents agree to sell it to their daughter for $260,000. That $60,000 gap is the gift of equity.
If the daughter uses a conventional loan, she can put the gift of equity toward her down payment. Her gift of equity represents about 18.75% of the appraised value ($60,000 ÷ $320,000 = 18.75%). Since most conventional loans need 5% down on a primary residence, she’s covered. She could even get close to that 20% mark where private mortgage insurance drops off.
Now for the tax piece. The parents are married and filing jointly, so they can give up to $38,000 gift-tax-free ($19,000 per parent). The remaining $22,000 in equity ($60,000 minus $38,000) gets reported on Form 709, but it just chips away at their $15 million lifetime exemption. No actual tax gets paid.
The daughter takes out a $260,000 mortgage. At a 6.75% interest rate on a 30-year fixed loan, her monthly principal and interest payment comes to about $1,686. Add property taxes, homeowner’s insurance, and maybe mortgage insurance if she’s under 20% equity based on the sale price, and she’s looking at a total monthly payment somewhere around $2,100 to $2,300. Compare that to what she’d pay at full market price with a smaller down payment, and the family deal saves her hundreds every month.
Buying a home from a family member can save you money and stress, but only if you handle it the right way. Get a professional appraisal, hire an attorney, disclose the relationship to your lender from day one, and put everything in writing. The gift of equity your relative gives you might be the boost you need to get into homeownership sooner than you thought possible. Don’t skip the legal and financial steps just because you trust the person selling. AmeriSave can help you sort through the loan options and figure out the right financing for a family home purchase. Protect the deal, protect the relationship, and you’ll come out with both a home and your family intact.
Yes, you can get a mortgage to buy a house from your parents or other family members. Your credit will be checked, your income will be looked at, and your home will be appraised, just like any other home buyer. The main difference is that you have to tell the lender how you know the seller. Some loan programs have different rules for how much money you need to put down for these kinds of loans. AmeriSave has a number of loan options that can help families buy things. These include FHA and conventional loans.
A gift of equity is the difference between the appraised value of a home and the lower price that a family member sells it for. If a house is worth $300,000 and sells for $250,000, the $50,000 difference is the gift of equity. Most lenders will accept this as part of your down payment as long as you have a formal gift letter that explains the deal. You can learn how different types of gifts can help you buy a home by looking at AmeriSave's down payment guide.
The person who buys the gift does not have to pay gift tax. If the gift is more than the annual exclusion ($19,000 per person), the seller is the one who has to report it. The seller usually doesn't have to pay anything, though, because the gift only lowers their lifetime exemption, which is $15 million. A tax professional can help both sides see the whole picture. At AmeriSave, you can find out more about the costs of buying a home.
It all depends on the kind of loan. Most of the time, you need to put down 3% to 5% for a primary residence with a conventional loan, and there is no extra fee for selling to a family member. FHA loans raise the minimum to 15%, but if you're buying a family member's main home, the minimum goes back down to 3.5%. Some veterans may not have to put down any money for a VA loan. To find the best loan for your needs, talk to an AmeriSave loan expert.
You don't need a real estate agent, and not hiring one can save you 5% to 6% on commission fees. You should hire a real estate lawyer to write or look over the purchase agreement, handle the title transfer, and make sure the deal follows all state and federal laws. The cost of hiring a lawyer is small compared to the money you will save on agent fees. You can use AmeriSave's closing cost tools to help you plan for these costs.
This is hard. Fannie Mae and Freddie Mac don't let you use regular financing to buy investment property that isn't at arm's length. You can only use FHA loans to buy your main home. If you want to buy a relative's house as an investment, you'll probably need to pay cash or find a portfolio lender who keeps their loans in-house. Depending on the details of your deal, AmeriSave's investment property loans may have different options.
The lender won't give you a loan for more than the appraised value if the appraisal comes in lower than the sale price. You would have to either renegotiate the price with your family member, pay the difference yourself, or walk away from the deal. This is one reason why it's a good idea to get an appraisal early on. It makes things clear and stops bad feelings from happening later. Check out AmeriSave's home purchase loans to see what you can do.
It's possible, but it depends on the type of loan. You can usually take over the terms of an FHA, VA, or USDA loan. Most conventional loans have a "due on sale" clause that says the full balance must be paid when the property is sold. If your parents have a low interest rate on an assumable loan, it could save you a lot of money compared to today’s rates. You would still have to meet the lender's requirements. Start by looking at AmeriSave's current mortgage rates to see what your options are.
Think of it as a business deal. Put everything in writing, hire a lawyer who specializes in real estate, get a home inspection even if you trust the seller, and agree on a clear timeline. Unspoken expectations are the main cause of family fights over real estate. Write in the contract that the seller can stay in the house for three months after closing. If you want credits for repairs that need to be made, talk about it ahead of time. You can stay organized with AmeriSave's home buying checklist.
The sale itself isn't against the law, but it causes a lot of problems. The IRS would see almost the whole value of the home as a gift, which could use up a lot of the seller's lifetime exemption and require more paperwork. Also, no mortgage lender will lend money for a $1 sale. You would have to pay cash or set it up as a gift transfer with the help of a lawyer. If a family member wants to give you a house for very little money, you should talk to a tax expert first. You can learn more about your financing options at AmeriSave's resource center.
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