Our DM has a problem with the new rules for familiars outline in Volo's, etc.  A Faerie Dragon is a powerful ally, even when it can't attack.  The first problem he had was that for the cost of a first level spell, your familiar could have access to up to 4th level spells.  Which should mean that find familiar would need to be at least a 4th level spell.  The second problem is that a violet dragon comes with three cantrips and six spells.  That's nine extra spells for "free" every day.  We are toying with the following house rules to balance this:

1. Allow Find Familiar to be upcast.  The maximum level of spells that your familiar could have would be the level you cast it at.  So a first level wizard would only have a familiar that could cast first level spells (red or orange faerie dragon).  At will spells that are a feature of the familiar (like improved invisibility) are exempted from this limitation.
2. To address the power creep that comes with extra spell slots: Have the familiar use its master's slots to cast their spells.  Now a sorcerer does not get any extra spells, but their familiars could cast spells (mostly utility types) that don't count against their spells known.  Again, the at will spells are exempted from this rule.
3. Warlocks might be short-changed if their familiars used the warlock's spell slots, since they only have a few.  For a pact of the chain warlock, this limitation is lifted.  Their familiar gets its spell slots from the warlock's patron instead.  Only the pact of the chain has access to this feature, and this advantage slightly balances out the fact that other classes now have access to special familiars.

What do you think?  Do these house rules make sense?

P.S. - Also nerfs the gazer (must be at least a 5th level spell to summon one of these).  And the gazer would probably chew right through most wizard's spell slots if it was in combat.

Could you tell us what chapter this is in? I can't find it.

Page 213 of Volo's guide (and also page 347 of Mordenkainen's Monsters) have a Variant Familiar rule that applies to spellcaster NPCs (per Jeremy Crawford, 10/18/2017)

Allowing PCs to use faerie dragons or gazers is already a homebrew addition, so adding limitations sounds fine.  Seems easier to just use the Find Familiar spell rules as written though

Those variant familiar rules aren’t for casting find familiar, they’re for if you happen upon one of those creatures and through your interactions with it it chooses to become your permanent familiar.

Quote from IamSposta >>

Those variant familiar rules aren’t for casting find familiar, they’re for if you happen upon one of those creatures and through your interactions with it it chooses to become your permanent familiar.

 This. The mistake you and the DM are making is that the Find Familiar spell ONLY summons the creatures listed in the spell.

From the Find Familiar spell:

"You gain the service of a familiar, a spirit that takes an animal form you choose: bat, cat, crab, frog (toad), hawk, lizard, octopus, owl, poisonous snake, fish (quipper), rat, raven, sea horse, spider, or weasel."

THOSE are the ONLY creatures you can summon using a Find Familiar spell unless you are a Pact of the Chain warlock which gets the following additional options using that spell.

"You learn the find familiar spell and can cast it as a ritual. The spell doesn’t count against your number of spells known. When you cast the spell, you can choose one of the normal forms for your familiar or one of the following special forms: imp, pseudodragon, quasit, or sprite."

A warlock could also use Find Familiar to summon the additional creature types listed.

Those are ALL the options available with the spell. All of the other Familiar options are "Variant Familiars". This applies to either PCs or NPCs where a specific creature decides to ally themselves with a spellcaster and become a familiar. The creature may choose to leave at any time. They can't be resummoned, they can't be tucked away into a pocket dimension, none of the abilities or constraints imposed by the Find Familiar spell apply to a Variant familiar.

This is why you and your DM think these are too powerful .. because they can NOT be summoned by the Find Familiar spell. If you encounter one of these creatures, they happen to like you, then they might choose to become your familiar but it isn't something you get to choose by casting a spell.

Here is the text for the Variant Familiar rule for a Pseudodragon:

"VARIANT: PSEUDODRAGON FAMILIAR

Some pseudodragons are willing to serve spellcasters as a familiar. Such pseudodragons have the following trait.

Familiar. The pseudodragon can serve another creature as a familiar, forming a magic, telepathic bond with that willing companion. While the two are bonded, the companion can sense what the pseudodragon senses as long as they are within 1 mile of each other. While the pseudodragon is within 10 feet of its companion, the companion shares the pseudodragon’s Magic Resistance trait. At any time and for any reason, the pseudodragon can end its service as a familiar, ending the telepathic bond."

A pact of the chain warlock could summon one up ... anyone else that wants a pseudodragon familiar has to find one and befriend them.

Here is the Variant Familar text for a quasit:

"VARIANT: QUASIT FAMILIAR
Mortal spellcasters interested in extraplanar familiars find quasits easy to summon and eager to serve. The quasit plays the part of the obsequious servant. It serves its master well, but it goads the mortal to greater and greater acts of chaos and evil. Such quasits have the following trait.

Familiar. The quasit can serve another creature as a familiar, forming a telepathic bond with its willing master. While the two are bonded, the master can sense what the quasit senses as long as they are within 1 mile of each other. While the quasit is within 10 feet of its master, the master shares the quasit's Magic Resistance trait. At any time and for any reason, the quasit can end its service as a familiar, ending the telepathic bond."

The NPC Mage also has an option to have a Familiar which can be one of these unusual creatures but this applies only to NPCs.

The text for the Gazer Variant Familiar and others in Volos and elsewhere is similar to that for pseudodragons/imps etc

"Variant: GAZER FAMILIAR
Spellcasters who are interested in unusual familiars find that gazers are eager to serve someone who has magical power, especially those who make a point of bullying and harassing others. The gazer behaves aggressively toward creatures smaller than itself, and it tends to randomly attack house pets, farm animals, and even children in town unless its master is very strict. A gazer serving as a familiar has the following trait.

Familiar. The gazer can serve another creature as a familiar, forming a telepathic bond with its willing master, provided that the mater is at least a 3rd-level spellcaster. While the two are bonded, the master can sense what the gazer senses as long as they are within 1 mile of each other. If its master causes it physical harm, the gazer will end its service as a familiar, breaking the telepathic bond."

TLDR :) ... Variant Familiars refer to specific creatures that choose to become familiars. They can not be summoned by the Find Familiar spell at all (unless the DM wants  to homebrew it) and they have rules that differ from the creatures summoned by the Find Familiar spell (they can't be placed in a pocket dimension. If they die, they are dead and can't be resummoned etc).

I went back and re-read the text on P. 213 in Volo's:

Variant: Familiars 
Any spellcaster that can cast the spell find familiar spell (such as an apprentice, warlock or wizard) is likely to have a familiar.  The familiar can be one of the creatures described in the spell (see the Player's Handbook) OR some other Tiny monster, such as a cranium rat, a crawling claw, a gazer, an imp, a pseudodragon or a quasit.

Emphasis mine, and this would not be homebrew...

Which would seem to imply that there are two types of variant familiars: those that you summon through the spell, and those that choose to ally themselves with a spellcaster of an appropriate disposition.  There may be advantages and disadvantages to each.

• A familiar that you summon can be moved into a pocket dimension (like a pokeball?) or summoned again if it dies.
• A familiar that chooses to join you may also choose to leave, and if it dies, it is gone forever (without magic or a wish, presumably).  But some traits that it has (such as magic resistance) can be shared with the caster if the familiar is within 10', and the range of telepathy is extended to one mile (as opposed to only 100' for the summoned variant).

You can see where my confusion comes from.  Clearly a familiar that chooses to join you has free will in the matter, and whether or not it chooses to join you will be up to the Dungeon Master.  This could prevent some types of familiars that could be unbalancing (such as a gazer).

There is no indication if you summon a familiar with magic resistance (such as a pseudodragon), if the magic resistance trait is still shared with the caster, or if the range of telepathy is increased for a special familiar.

My DM was cool and just let me include a fairy dragon as a summonable option, but made sure it was not past the challenge rating of the imp. It ends up being a yellow fairy dragon. Here are her stats in case you were wondering what it looks like. We also modified the breath weapon to be resisted each round with a WIS save. I am playing a Warlock of the Chain, so it made it an easier buy in from them because it is the classes special feature. I also was able to snag a ring of spell storing and the fairy dragon can cast her spells into it which helps with my warlocks limited spells as well. It has not impacted the power of our game and has made the breath weapon an extension of my character's options in combat so they do not feel like a EB spam-bot. The BA invisibility is a supe'd up fly-by, and has a few other niche uses when exploring. Overall it is a great extension of a character that has invested in being a chain-lock and picked up the Investment invocation. I built a scout/controller character and building around my familiar has been awesome.

Faerie Dragon - Yellow (Tiny fey)
AC 15  HP 16  Initiative +5
Speed: 10ft., fly 60ft., swim 40ft.
Str 3(-4), Dex 20(+5), Con 13(+1)
Wis 12(+1), Int 14(+2), Cha 16(+3)
-Skills: Arcana +4, Perception +3, Stealth +7
-Senses: darkvision 60 ft., passive perception 13
-Languages: Draconic, Sylvan
***Traits***
-Superior Invisibility: (C-BA) at-will invisibility
-Limited Telepathy: 60 ft. telepathy with faerie dragons
-Magic Resistance: ADV on saves against spells and magical effects.
***Actions***
-Melee Weapon Attack (bite): +7 att, 1 P/magic
-Euphoria Breath: Recharge 5+, single target, 5 ft., WIS, 1 min, target can't take R/A/BA and must roll a d6 at the start of each of its turns:
    1–4. Full move in random direction
    5–6. Spend rnd making WIS save to break free
-Innate Spellcasting: 1/LR: color spray O, mage hand O, dancing lights O, minor illusion O, mirror image O

Quote from SebulbaChip >>

I went back and re-read the text on P. 213 in Volo's:

Variant: Familiars 
Any spellcaster that can cast the spell find familiar spell (such as an apprentice, warlock or wizard) is likely to have a familiar.  The familiar can be one of the creatures described in the spell (see the Player's Handbook) OR some other Tiny monster, such as a cranium rat, a crawling claw, a gazer, an imp, a pseudodragon or a quasit.

Emphasis mine, and this would not be homebrew...

Which would seem to imply that there are two types of variant familiars: those that you summon through the spell, and those that choose to ally themselves with a spellcaster of an appropriate disposition.  There may be advantages and disadvantages to each.

• A familiar that you summon can be moved into a pocket dimension (like a pokeball?) or summoned again if it dies.
• A familiar that chooses to join you may also choose to leave, and if it dies, it is gone forever (without magic or a wish, presumably).  But some traits that it has (such as magic resistance) can be shared with the caster if the familiar is within 10', and the range of telepathy is extended to one mile (as opposed to only 100' for the summoned variant).

You can see where my confusion comes from.  Clearly a familiar that chooses to join you has free will in the matter, and whether or not it chooses to join you will be up to the Dungeon Master.  This could prevent some types of familiars that could be unbalancing (such as a gazer).

There is no indication if you summon a familiar with magic resistance (such as a pseudodragon), if the magic resistance trait is still shared with the caster, or if the range of telepathy is increased for a special familiar.

 Yep ... you find that comment in both the Monster Manual and Volos.

In the MM it is on page 347 after the Mage stat block:

"VARIANT: FAMILIARS
Any spell caster that can cast the find familiar spell (such as an archmage or mage) is likely to have a familiar. The familiar can be one of the creatures described in the spell (see the Player's Handbook) or some other Tiny monster, such as a  crawling claw, imp, pseudodragon, or quasit."

Both Archmage and Mage are specific NPC stat blocks.

In Volo's it is on pg 213 in Appendix B NON-PLAYER CHARACTERS after the Conjuror stat block.

"VARIANT: FAMILIARS
Any spellcaster that can cast the find familiar spell (such as an apprentice, warlock, or wizard) is likely to have a familiar. The familiar can be one of the creatures described in the spell (see the Player's Handbook) or some other Tiny monster, such as a cranium rat, a crawling claw, a gazer, an imp, a pseudodragon, or a quasit."

The apprentice wizard, the various wizard NPC stat blocks (conjuror, diviner, evoker ...) and the various warlock NPC stat blocks are all in this section on NPCs.

The common theme between both of these citations is that they are NPC options for the DM to use if they wish. They are in the Monster Manual or in the NPC chapter of Volos. NPCs and player characters have different options. This is a Variant rule for Familiars for NPCs.

A DM would be free to make use of it if they want to but given where these comments are found it seems like they are intended to be Variant NPC rules and not Variant player character rules.

In response to the other point, there is one little caveat about abilities. A summoned familiar is a spirit (fiend, celestial, fey) which takes on the attributes of the creature you request. It does not carry the ability to extend its magic resistance coverage to its summoner. When a creature chooses to join as a familiar, it has the ability to extend its protections through its bond. Volo's was great because it let players have a little backing from WotC to help DMs feel more comfortable allowing players to open up their options to fit their character vision. Our group rule is:

Find Familiar: CR 1/8 or lower tiny beast (octopus breaks the size rule, but is still allowed)

Chain: CR 1 or lower non-humanoid, tiny anything

Obviously, talking to you DM is mandatory about your plans.

Some homebrew that I've seen is that if, through exploration and RP, if you befriend one of the creatures listed as Variant Familiars and you have access to the Find Familiar spell, you can use that spell to instead grant the benefits of the Find Familiar spell to one of those other creatures. I actually know someone who runs all Famliars that way... even if your Familiar is a mundane creature like a cat or frog, you still need to catch and befriend an actual in-game cat or frog before you can cast the spell.