If you love your parents' home, why not buy it from them?
The idea might have a lot of appeal across the generations from you to your parents and even their parents – but don’t let your heart win over your head on the decision.
Living together with your parents after buying their home has become a trend, says John Graham, emeritus professor of marketing and international business at the University of California, Irvine, and co-author of "All in the Family: A Practical Guide to Successful Multigenerational Living."
Buying your parents' home is "consistent with this whole idea that we're returning to the interdependence of the extended family and moving away from the 50-year experiment of the nuclear family," Graham says.
Gift of equity
The biggest obstacle for most first-time homebuyers is the down payment, says Greg Cook, senior loan officer with Platinum Home Mortgage in Temecula, California.
If you don't have cash, your parents can give you what's called a "gift of equity," which refers to the value they have in their home. With an equity gift, you won't need as large a down payment or perhaps any down payment at all.
A equity gift might be easier for your parents if they can sell their home to you without a real estate broker, says Jay Dacey, mortgage broker at Metropolitan Financial Mortgage Co., a mortgage company in Minneapolis.
"If the sellers are avoiding 5 to 10 percent in Realtor fees and closing costs, they can sell their home and gift that money for the down payment," Dacey says.
Qualifying is the same as any mortgage
The catch is that you'll still need to qualify for a mortgage as if you were buying any other home.
"You're not going to get off easy when it comes to the loan," Cook says. "It's going to be the same guidelines. The lender has to treat everybody the same."
Purchase price
To make the plan work, you and your parents will need to agree on a purchase price for their home.
If the price is less than the home's market value, the difference could be considered a gift from your parents to you.
If the price is more than the market value, the lender could require a larger down payment.
Refinance instead of purchase
Another option is to structure your transfer as a refinance rather than a purchase.
To do it that way, your parents add you to their home's title, you make the mortgage payments for a year or so, and then the mortgage is refinanced in your name only and your parents are removed from the title, Cook explains.
If your parents want to extract cash, the refinance will be a cash-out. If not, it can be what's known as a "rate-and-term refi."
Pros, cons
One advantage of buying your parents' home is that you won't have to coordinate your transaction with total strangers who might have an inflexible schedule to close, Dacey says.
"It's just a little bit easier from a timing perspective," he says.
One disadvantage is that you'll be responsible for future problems with your parents' -- now your -- home, and that could make family gatherings awkward.
"What happens a year later when the roof leaks and the boiler is shot, you didn't get the home inspected because you bought it from your parents and it's Christmas, Thanksgiving or the grandkid's birthday party?" Dacey says.
Financial, legal, tax and inheritance consequences
Buying your parents' home can have major financial, legal, tax and inheritance consequences. You and your parents should consult an attorney, accountant, financial planner or other advisor for help with your individual situations before you move forward.
You should also put your agreement in writing and share the information with your siblings, if you have any, Graham suggests.
"All of this has to be considered in the context of everyone getting along with one another, and not all families work the same way," he says. "A lot of times, (multigenerational living) works great. A lot of times, it's just fine. Sometimes, it doesn't work at all."
Given the pros and cons, Dacey says you should think hard about whether you really like your parents' home that much.
"Don't buy your parents' home just for the sake of buying it or because it's the home you grew up in or you'll get some equity," he says. "Make sure it's the house that you want."
If you're thinking about buying a home, get a sense of current mortgage rates to determine just how much your mortgage payment will be. If you have a question for us, be sure to fill out the “Ask the Expert” form on HSH.com.
