**Title: Navigating Non-Arms Length Transactions: Buying a Home from Family or Friends**
**Introduction**
Buying a house from a family member or friend can be an appealing option. You might already be familiar with the home, the closing process can be less complicated, and you might get a good deal. However, non-arms length transactions, as these are called, come with their own set of considerations and potential complications. This guide will help you understand what a non-arms length transaction is, the legal and financial implications, and how to navigate the process smoothly.
**What Is a Non-Arms Length Transaction?**
A non-arms length transaction occurs when the buyer and seller have a personal relationship. This includes sales between friends, family members, or co-workers. Unlike typical real estate transactions where both parties act in their own self-interest, non-arms length transactions can involve different motivations, such as a parent selling their home to an adult child.
**Arm’s Length vs. Non-Arm’s Length Transactions**
Real estate transactions generally fall into two categories: arms length and non-arms length. Arms length transactions involve parties who do not have a personal or professional relationship and act independently. In contrast, non-arms length transactions involve parties with a pre-existing relationship, which can lead to different dynamics and potential complications.
**Are Non-Arms Length Transactions Legal?**
Non-arms length transactions are legal but face more scrutiny due to the potential for fraud. The close relationship between the parties can lead to opportunities for financial misconduct, such as collusion to defraud lenders or investors. Therefore, these transactions are subject to stricter regulations and guidelines.
**Lenders Regulatory Obligations**
Lenders have a responsibility to protect themselves and the integrity of the mortgage lending market. As such, they impose additional guidelines for non-arms length transactions. For example, in a short sale, lenders may require an arms length affidavit to prevent mortgage fraud. This affidavit states that there is no prior relationship between the buyer and seller, and violations can result in civil or criminal liabilities.
**Things to Know When Buying a House from Family**
When engaging in a non-arms length transaction, several requirements and considerations come into play to protect all parties involved, including the lender.
**Increased Restrictions**
Non-arms length transactions often come with additional requirements. For instance, a mortgage lender may require the seller to verify that they are not delinquent on their existing mortgage. Depending on the lender or loan type, you might also need to make a specific down payment.
For FHA loans, the down payment must be at least 15% of the purchase price, with some exceptions allowing for a 3.5% down payment. These exceptions include purchasing the primary residence of a relative, fiancé, or domestic partner, buying a builders new home as an employee, or purchasing a property youve rented for the last six months.
**Tax Implications**
Buying a house from a family member who offers a gift of equity can have tax implications. Under current IRS laws, an individual can give an equity gift of $18,000 per year, or $36,000 for a married couple, without it being taxable. Exceeding this amount can result in taxable income for the seller. Additionally, if you sell the house within a few years, you might be liable for capital gains taxes.
**Potential Family Strife**
Buying a home from a family member can affect family dynamics. The emotional aspects of the transaction can complicate the process, so its essential to treat the purchase as a business transaction to avoid potential conflicts.
**Cheaper Closing Costs**
One advantage of buying a house from a family member is the potential for lower closing costs. You may not need a real estate agent, saving up to 6% in commission. Additionally, the closing date can be more flexible, and there might be less need for a home inspection if you trust the seller.
**What Is a Gift of Equity?**
A gift of equity occurs when a family member sells you a property below market value, with the difference considered a gift. This gift can often be used as a down payment. However, it requires specific paperwork, including an appraisal and a settlement letter noting the gift during closing.
**Steps to Buying a House from a Family Member**
1. **Get Preapproved**: Start the mortgage approval process to determine how much you can borrow. This involves verifying your credit score, debt-to-income ratio, income, and assets.
2. **Determine the Purchase Price**: Establish the fair market value of the home. Consider hiring an appraiser or consulting a real estate agent for a comparative market analysis.
3. **Draw Up a Purchase Agreement**: Create a sales contract outlining the transaction details, including the price and any contingencies.
4. **Complete a Title Search**: Hire a title company to ensure there are no liens or claims on the property.
5. **Consult an Attorney**: An experienced real estate attorney can help you navigate the legal aspects of the transaction.
6. **Continue Through Underwriting**: The lender will scrutinize the transaction to ensure there is no fraud or undue influence.
7. **Close on Your Home**: Finalize the transaction, transfer the title, and receive the keys to your new home.
**Conclusion**
Non-arms length transactions can be a great way to purchase a home with sentimental value and potentially lower costs. However, they come with additional scrutiny and potential complications. By understanding the process and being prepared, you can navigate these transactions successfully. If youre ready to buy a home, contact O1ne Mortgage Inc. at [https://o1nemortgage.com](https://o1nemortgage.com) or call 888-372-8820 to get started on your mortgage application.
**Keywords**: non-arms length transaction, buying a house from family, mortgage lender, gift of equity, real estate transaction, FHA loan, home purchase, family dynamics, closing costs, mortgage application, O1ne Mortgage Inc.
