Background: Exposure to inadequate home environment may put the healthy development of familial high-risk children at risk. This study aimed to investigate associations between risk factors and an adequate home environment of children having a parent diagnosed with schizophrenia or bipolar disorder. Methods: From a cohort of 522 children, data from 463 7-year-old children was included. Of these 172 children had familial risk for schizophrenia, 109 children had familial risk for bipolar disorder, and 190 were population-based controls. As part of a comprehensive battery, all participants were assessed with the Middle Childhood-Home Observation for Measurement of the Environment Inventory (MC-HOME Inventory) measuring the quality of the home environment. Results: When analyzing all families together, we found that having a parent diagnosed with schizophrenia would have a negative impact on the home environment (ß = -1.08; 95% CI (-2.16;-0.01); p = 0.05), while familial risk for bipolar disorder did not show significant predictive value. Being a single caregiver and child having experienced severe life events from ages 4 to 7 showed significant negative impact, while child having a mental illness diagnosis did not. Being a female caregiver, good social functioning of the caregiver, high child IQ and not being a single caregiver were found to predict positive values for the home environment. We found similar results when analyzing caregivers with and without a diagnosis separately. Conclusions: Knowledge of what predicts good home environment should be used to inform development of early interventions for families at risk.