7 Pros and Cons of Buying a Home With Your Parents
September 20th, 2024
7 Pros and Cons of Buying a Home With Your Parents
Are you considering buying a home with your parents? Here is everything you need to know about buying a home with your parents.
Buying a home with your parents as a fresh college graduate, young professional, or older adult is similar to a traditional home sale. However, mixing family and finances can come with a few extra factors to consider.
Depending on your relationship with your parents, buying a home with them can be a great choice financially. Although both parties should keep their feelings and generational differences aside to ensure everyone is treated fairly in the situation.
Once the kids are grown and out of the house, many parents sell their family home to their children. There are no laws that state it is illegal to sell your house to a family member, as it can be an intelligent strategy for the parents and child. However, buying a home with your parents is slightly different.
With rising inflation, student debt, stagnant wages, and many other factors, it is becoming increasingly difficult for young adults to purchase property independently. According to the Urban Institute, young adults' homeownership rate has declined from 45.0% in 1990 to 37.0% in 2015.
Many young adults have turned to their parents for help in order to own real estate. Co-owning with parents can be a tricky process. Luckily, we have compiled this helpful list of pros and cons to help you make the best decision.
Keep reading to learn all about the pros and cons of buying a home with your parents.
Chapters
1. Pro: Split Finances
If you are considering buying a home with your parents, then you'd be combining your expenses to pay for the home. This combination of their finances and yours may enable you to purchase a larger and more comfortable home.
Elderly parents are more likely to have considerable savings or income, which would help tremendously when splitting the housing costs. These housing costs include the down payment, mortgage, property taxes, and insurance. Additionally, all of the decor and furniture can be passed down or made easier to afford with your parents' help.
Splitting finances will enable you to increase buying options. That home you always dreamed of but could never afford on your own could be all yours with the help of your parents. From larger homes and better locations to investment properties, you'll have a much larger range of homes to choose from.
2. Pro: You'll Be Close to Family
Living in close proximity to the family may not be an advantage to everyone, but if it applies to you, then it can be extremely beneficial. Emotional support from a trusted loved one can create a strong support system.
No matter why you have decided to live or buy a home with your parents, the shared space means more time to be together. This can be exceptionally beneficial if your parent is older and may need assistance.
In addition to shared finances are shared responsibilities. Depending on your situation, you may need extra help taking care of the home, cooking meals, caring for your family, or more. This sharing of duties can save time and effort for all parties involved.
As a co-owner of the property, it will also be the parent's responsibility to take care of household chores, maintenance, and repairs. Household maintenance and repairs can prove costly, so any extra assistance can be extremely valuable to a homeowner.
3. Pro: More Mortgage Loans Available
If you do buy a home with your parents, there are a couple of different payment options. Similar to buying a house on your own, you can buy with cash, which means you pool your funds together, totaling the purchase price and closing costs. This may be the best option if you want the home outright. However, you must have sufficient liquid assets to make a purchase.
Many people who buy a home with their parents buy it as co-borrowers. Buying a home as a co-borrower means that more than one person is listed on the mortgage application. The credit, income, and assets listed on the application are used to assess qualification for a home loan.
There are two types of co-borrowers:
- Occupant co-borrower: This person can purchase the home with you and reside on the property as their primary residence.
- Non-occupant co-borrower: This person will not live on the property but will assist in qualifying and purchasing the property.
Finally, you may purchase the home with your parent as a co-signer. In this case, those who co-sign have no rights to the property itself but are responsible for maintaining payments if others on the title cannot.
When buying a home with a parent, you will have more loan options than during a typical home sale.
- Fannie Mae HomeReady Loan: This loan is ideal for lower-income borrowers and allows you to add additional housemates' income for approval and provide 3% coverage of closing costs for those who haven't purchased a home in the last three years.
- Conforming Loans: A standard conforming loan is acceptable if your income eligibility and down payment are not a concern. This buyer must put down at least 20% and will not have to pay for private mortgage insurance (PMI).
- FHA Loans: This type of loan allows down payments starting at 3.5% with a 580 or higher credit score.
- USDA Loans: USDA loans are used if the property is in a rural area or small town. Only a single-family home can be purchased; a minimum credit score of 640 is required.
- VA Home Loans: If at least one member of the family is a veteran, active-duty service member, or surviving spouse, then you may qualify for this loan.
4. Cons: Loss of Privacy
While some may see living with their parents or owning a home with their parents as an advantage, some may see it as a loss of privacy. Depending on your relationship and how you purchased the home, it will have an impact on how much of a right the parent has to have on the property.
No matter your relationship, you should consider how the close proximity may impact your relationship. If you value personal space or don't want your family to know what you are doing every day, then this is something to consider.
In addition, you are bound to disagree at some point. From generational differences to conflicting expectations, disagreements may arise. You should consider this and prepare if you do buy a home with your parents.
5. Cons: Increased Caregiving Responsibilities
Similarly to how you will be sharing housing responsibilities, your parent or yourself may need caregiving responsibilities. Some homebuyers will buy a home, so it is easier to take care of their parents.
This increase in responsibilities may seem like a no-brainer to some, but it is definitely worth considering before you buy a home together.
6. Cons: Financial Risks
There are a number of financial risks when buying a home with your parents. When co-signing a mortgage, you are both responsible for the loan, and your credit score can be impacted if they default.
Putting too much trust in a handshake deal with your loved one may result in issues if one party cannot pay. To avoid this, it is recommended that you meet with an estate planning attorney and put everything in writing.
Owning the home together can result in more financial problems if one or both parties have outstanding debts or liabilities. If one has a debt, a judgment creditor could place a lien on the property, possibly leading to foreclosure on the home.
Legally, the most important aspect of buying a home is agreeing on who owns the home and how it may be passed on. In this case, you need to have a serious conversation about who is responsible for purchasing and ownership.
It would be best if you met with an estate planning attorney who can assist you through the process in order to avoid any conflict down the road.
7. Should You Buy a Home With Your Parents?
While every big decision has its own pros and cons, buying a home with your parents is an exceptionally big decision that requires careful consideration. You'll need to have an open and honest discussion about your finances, living arrangements, boundaries, and more before making a choice.
As you debate whether or not this is the best decision, consider these questions:
- Will this be a long-term or temporary situation?
- Whose name(s) will be listed in the home's title?
- What are the living arrangements?
- Who is responsible for home maintenance and repairs?
- What happens if/when one party wants to leave the agreement?
- How will home equity be shared?
- Whose credit and income will be used to qualify for a home loan?
- How will we pay the mortgage payments?
Methodology
We used information and data from several different sources, as well as our own data, to determine everything you need to know about buying a home with your parents. Most of the data was sourced from the following sources:
- TurboTax
- Urban Institute
FAQ: Buying a Home With Your Parents
Here are some commonly asked questions about buying a home with your parents.
Is buying a house with a parent a good idea?
Buying a home with your parents can provide certain financial and emotional benefits, such as tax deductions and emotional support. However, whether or not this is a good idea for you personally will highly depend on your relationship with your parents.
Is it a good idea to put your name on your parents' house?
Transferring your parent's home into your name can make you subject to capital gains tax and responsible for any increase in the value of the house.
Do I have to pay taxes if my mom gives me a house?
No, there is no gift tax when you give your child your home. There is no income tax for the children. However, the child may have to pay capital gains tax if they sell the property later on.
Is it better to gift or inherit a house?
From a tax perspective, it is more advantageous to inherit a home rather than be gifted a home before the owner's death. If you inherit a property, you can sell it, keep it, or use it as a rental property. Additionally, according to TurboTax, inheritances are not considered income for federal tax purposes.
Is it a good idea to buy a house with your adult child?
Co-owning a home with your adult child can make a lot of sense on paper, and it is a great way to provide financial stability for your child. The downside is that, depending on the parent-child relationship, it can create a legal issue. This is a dramatic step and requires a great deal of thought.
Buying a Home With Your Parents - The Bottom Line
In today's real estate market, it can be hard to afford a home all on your own as a young adult. Buying a home with your parents can be the solution you've been looking for as an aspiring homeowner.
While it can help you afford a bigger, nicer home, buying a home with your parents involved is complicated. Before making this decision, evaluate your relationship with your parents and your finances.
Ensure that everyone is on the same page about ownership, responsibilities, and housing costs. Make sure to meet with a trusted real estate agent who can help both parties understand the process.
If you are considering buying a new home with your parents, we recommend exploring the Raleigh area in North Carolina. Whether you're interested in Raleigh or not, feel free to contact one of our helpful real estate specialists, as they are eager to help you find the perfect home. We know that buying a home can be overwhelming, but a real estate agent can walk you through the entire process.
Ryan Fitzgerald
Hi there! Nice to 'meet' you and thanks for visiting our Raleigh Real Estate Blog! My name is Ryan Fitzgerald, and I'm a REALTOR® in Raleigh-Durham, NC, the owner of Raleigh Realty. I work alongside some of the best Realtors in Raleigh. You can find more of my real estate content on Forbes, Wall Street Journal, U.S. News and more. Realtor Magazine named me a top 30 under 30 Realtor in the country (it was a long time ago haha). Any way, that's enough about me. I'd love to learn more about you if you'd like to connect with me on Facebook and Instagram or connect with our team at Raleigh Realty. Looking forward to connecting!
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