How to Buy a House From a Family Member: Step‑By‑Step, Financing, Tax Rules, and Pitfalls

Why buying from family is different (and how to do it right)

Buying a home from a relative is a
non‑arm’s‑length
transaction, which means lenders and taxing authorities may apply extra scrutiny to ensure the price and terms are fair and properly documented. You’ll follow the typical homebuying steps-preapproval, contract, appraisal, title, and closing-but you also need to plan for specific issues like a gift of equity, related‑party disclosures, and documenting any below‑market pricing to avoid problems with your lender or the IRS [1] .

Step 1: Align on goals and ground rules

Begin with a transparent discussion about timing, occupancy plans, and whether the seller expects fair market value or is willing to consider concessions like a gift of equity or closing cost help. Clarify whether either party needs a rent‑back period or specific items included in the sale (appliances, furniture). Put major points in writing early to reduce misunderstandings later. Lenders often expect stronger documentation when family members transact, so capturing intent (gifts vs. sale price) at the outset helps streamline approval [1] .

Step 2: Get preapproved and disclose the relationship

Secure a lender preapproval before drafting the contract. Tell the lender it’s a related‑party sale; non‑arm’s‑length deals may require extra documents or conditions, but preapproval sets clear budget limits and signals seriousness. Standard guidance is to get preapproved so you know what you can afford and so the process stays efficient when the seller is ready to move forward [2] .

Step 3: Establish the price with an appraisal or comps

To determine a defensible price, use a professional appraisal and/or recent comparable sales. Lenders usually require an appraisal to validate market value. If you plan to sell below market, you may structure the discount as a
gift of equity
-a documented credit from the seller that can help with down payment and may reduce cash to close, subject to loan program rules. Pricing anchored to market evidence protects both parties and reduces financing risks [3] . Many lenders and advisors also recommend a third‑party valuation to support the contract price and any equity gift for underwriting [2] .

Step 4: Draft a thorough purchase agreement (use a real estate attorney)

Engage a real estate attorney to draft or review the purchase agreement. Contracts should spell out the price, gift of equity or cash gifts, fixtures/personal property, timelines, inspection rights, contingencies, and rent‑back if needed. Using an attorney helps avoid ambiguity and preserves family relationships. Industry guidance recommends each side have independent representation to prevent conflicts and ensure all disclosures and addenda are complete for the lender and title company [1] [2] .

Step 5: Prepare for lender scrutiny in non‑arm’s‑length deals

Lenders apply extra checks in related‑party transactions to reduce fraud risk. Expect to document the relationship, source of any gifts, occupancy intent, and the arm’s‑length nature of pricing unless using a documented gift of equity. Some loan programs have specific rules-for example, agency and FHA guidelines can require different down payments or documentation when parties are related, with exceptions for purchases from family as a primary residence. Work closely with your loan officer to understand required affidavits and proof of funds. These practices reflect standard lender risk controls for non‑arm’s‑length sales [1] [3] .

Step 6: Title search, title insurance, and closing logistics

Order a title search and obtain title insurance to protect ownership and satisfy lender requirements. The title company also coordinates payoff of any existing mortgages, prorations, and recording. Proper title work avoids future disputes over liens or ownership and ensures the deed transfer is recorded correctly. Even in family transactions, complete title and closing procedures are essential to prevent downstream claims [4] .

Financing options: conventional mortgage, FHA, and seller financing

Conventional mortgage: Many buyers use a standard loan with a documented gift of equity. Lenders may prohibit classifying the home as a second home or investment if there’s a family/business relationship, so plan to occupy as a primary residence when applicable. Disclose the relationship and provide any gift letters or equity gift documentation requested by underwriting [1] .

FHA/other programs: Some programs apply specific rules in non‑arm’s‑length scenarios, including down‑payment and documentation standards, with exceptions for purchases from relatives used as a primary residence. Confirm the latest program rules with your loan officer; program conditions can vary by scenario and change over time. Lenders will explain what additional affidavits or verifications are needed for related‑party sales [1] .

Seller financing (family loan): A family member may carry financing, but missed payments can strain relationships and enforcement (up to foreclosure) becomes personal. If pursued, use a promissory note, recorded deed of trust or mortgage, and a third‑party servicer to collect payments and report interest. Many advisors suggest traditional financing when possible to preserve family dynamics and provide standardized servicing and disclosures [4] .

Source: fool.com

Structuring a gift of equity and documenting cash gifts

A gift of equity occurs when the seller credits part of their equity to the buyer at closing, effectively reducing the buyer’s required down payment. Lenders usually require a gift letter and may limit who can provide the gift (typically family). The contract and closing disclosure should clearly state the gift amount and how it applies. A documented equity gift helps align a below‑market sale with underwriting rules and avoids confusion about the true price versus incentives [3] . Buyers can also receive
cash gifts
for down payment or closing costs, provided donor funds and transfer documentation meet lender requirements [2] .

Source: tadpull.com

Tax and benefits considerations to keep on your radar

Pricing below market and gifts: When family members sell below market or provide equity gifts, there can be gift tax reporting implications for the seller. Because tax rules are highly specific and can change, consult a tax professional to determine filing thresholds and whether any returns are required. Lenders and articles on related‑party transactions emphasize aligning sale price with market value unless properly structured as a documented gift [3] .

Medicaid look‑back: If an elder relative is selling a home and may seek Medicaid to fund long‑term care, be aware that transfers for less than fair market value within the
look‑back period
can trigger penalties. Federal rules generally apply a five‑year look‑back, and California has a shorter period that is being phased out, with elimination scheduled by July 2026. Families should coordinate with an elder‑law attorney before finalizing a discounted sale to avoid benefit eligibility issues [3] .

Practical checklist: documents and decisions

Use this working list to keep your transaction on track:

• Preapproval letter showing program, rate estimate, and max purchase amount; disclose the related‑party nature to your lender [2] .
• Market valuation via appraisal or recent comps; decide if any price reduction will be treated as a gift of equity [3] .
• Gift letter and documentation for any cash gifts or equity gift; include in contract and closing package [3] .
• Attorney‑reviewed purchase agreement with disclosures and timelines; each party ideally has separate counsel [1] .
• Title search, title insurance, and closing arrangements through a title company or closing attorney [4] .

Real‑world examples

Example 1 – Parent to child with gift of equity: A parent sells a $400,000 home to their child for $400,000 with a $60,000 gift of equity applied at closing. The buyer’s required down payment is reduced per loan guidelines; lender collects a gift letter, appraisal supports market value, and title handles recording. This approach helps the buyer qualify while preserving clear documentation for underwriters and tax advisors [3] .

Example 2 – Sibling sale at market price: Two siblings agree to transact at fair market value based on an appraisal. They use separate attorneys, a standard inspection period, and a normal closing timeline. Because there is no discount or gift, the lender focuses on validating the relationship and ensuring the price aligns with the appraisal. This keeps the process similar to a typical sale, with extra disclosures due to the relationship [1] [2] .

Example 3 – Considering seller financing: An aunt proposes carrying a note for a niece to simplify closing. They consult an attorney to draft a note and deed of trust and engage a third‑party servicer for payments. Both parties also price out a conventional loan; after reviewing risks of family enforcement, they opt for traditional financing to avoid potential conflicts, consistent with many advisors’ recommendations [4] .

Common pitfalls and how to avoid them

Vague terms: Handshake agreements lead to disputes. Use a written contract with clear timelines, inclusions, and remedies. Independent counsel helps maintain clarity [1] .

Skipping appraisal or title work: Even with family, you need an objective valuation and full title protection to avoid financing hurdles or future claims [3] [4] .

Not disclosing relationship to lender: Omissions can delay or derail underwriting. Always disclose; related‑party deals routinely face extra checks for fraud prevention [1] .

Overlooking benefits eligibility rules: If an elder seller may apply for Medicaid, plan for look‑back implications before agreeing to a below‑market sale or large gift of equity [3] .

Step‑by‑step: your action plan

1. Discuss goals, price approach, and possible gifts with your relative; outline key terms in writing [2] .
2. Get preapproved and inform your lender this is a non‑arm’s‑length transaction; ask about documentation and program options [1] .
3. Order an appraisal or collect recent comps; decide on market‑price vs. gift of equity structure [3] .
4. Hire an attorney to draft the purchase agreement; if feasible, each party retains separate counsel [1] .
5. Complete underwriting: provide gift letters, occupancy statements, and related‑party disclosures as required [1] .
6. Use a title company for search, insurance, and closing; ensure deed and loan are recorded properly [4] .

Alternatives if a direct purchase isn’t the best fit

If financing is tight or family needs more time, you could consider: a short‑term rent‑back after closing; a documented down‑payment gift instead of equity gift; a delayed closing with rate‑lock planning; or, where appropriate, a co‑signer. Each option requires lender approval and careful documentation in related‑party contexts [1] .

References

[1] Bankrate (2024). How to buy a house from a family member.

[2] Chase (2024). How to buy a house from a family member.

[3] SoFi (2025). How to buy a house from a family member.

[4] PeoplesBank Financial Resource Center (n.d.). Buying a home from a family member.