Buying a home from a family member in New Hampshire

How does buying a home from a family member work?

Much like any other purchase. You and the seller agree on a price and sign a purchase and sale agreement, the lender orders an appraisal, the title is checked, and you close with a closing attorney or title company. Lenders call this a non-arm's-length sale, because the buyer and seller are related, so they look a little more closely at the price, the paperwork and who will live in the home.

Family sales often skip listing the home, and some skip a real estate agent. You can still hire an agent or a New Hampshire real estate attorney to write the agreement and look after the details.

What is a gift of equity?

A gift of equity is when a family member sells you the home for less than its appraised value and gives you the difference as a gift. The lender can count that gift toward your down payment and closing costs, so you may need less cash of your own to close.

• Fannie Mae allows a gift of equity on a home you'll live in or a second home, for all or part of the down payment and closing costs, including prepaid items. It can't count toward the savings a lender may want you to have left after closing.
• The giver has to be an acceptable donor, such as a relative by blood, marriage, adoption or legal guardianship, or someone with a long-standing family-like relationship.
• The paperwork is a signed gift letterGift letter A signed letter from the person giving you money toward your purchase, stating it's a gift that doesn't have to be repaid. See the full glossary× and a closing statement that lists the gift of equity.

The gift funds guide covers gifts of cash, which follow similar rules.

How do loan programs treat a family sale?

• Conventional loans allow a gift of equity from an acceptable donor, and that donor isn't treated as an interested party to the sale, so the usual limits on seller contributions don't apply to it.
• FHA loans treat a sale between relatives as an identity-of-interest transaction and limit the financing on most of them. There are exceptions that allow the usual FHA financing, including buying a family member's own home as your home, and buying a relative's home you've rented and lived in for at least six months before the sales contract, with a lease or other proof.
• VA and other programs have their own rules for family sales and gifts. Tom can check which program fits before you settle on a price.

Program details are in the conventional and FHA guides.

What are the steps to closing?

1. Talk with Tom first. Get pre-approved and pick a program before you and the seller agree on a price, since the program affects how a gift of equity works.
2. Agree on the price and put it in writing. A purchase and sale agreement is still needed. If there's a gift of equity, the agreement should say so.
3. Appraisal. The lender orders one to confirm the home's value, which also sets the size of the gift of equity.
4. Gift letter. The seller signs a letter stating the amount of the gift and that it doesn't need to be repaid.
5. Title and payoff. The closing attorney or title company checks the title and pays off any mortgage or liens the seller has on the home.
6. Closing. The gift of equity shows on the closing statement as a credit to you.

The after-you-apply guide walks through the loan steps in detail.

What about taxes?

New Hampshire's real estate transfer tax applies to sales, and it's usually split between buyer and seller. Ask the closing attorney or title company how it's figured on your sale. The closing costs guide explains the tax.

A gift of equity is a gift for federal tax purposes, so the seller may need to file a gift tax return. That doesn't usually mean tax is owed. The seller should check with a tax professional, and the IRS gift tax questions page is a good starting point.

What mistakes should we avoid?

• Agreeing on a price before checking the loan program's rules
• Skipping a written purchase and sale agreement
• Moving money between family accounts without a paper trail; gifts need documents
• Forgetting the seller's mortgage or liens, which have to be paid off at closing
• Buying from an estate without the right authority to sell; for an inherited home, a New Hampshire attorney can confirm who can sign