According to the NAR 2025 Profile of Home Buyers and Sellers, 22% of first-time buyers received help from relatives or friends through a gift or loan for their down payment. That's nearly one in four buyers leaning on family money.
But how that money moves matters. A gift and a loan are treated very differently by the IRS and by mortgage lenders — and mixing them up can create tax headaches or even derail your loan approval.
This guide covers the rules, the paperwork, and the practical steps for getting family money into your down payment the right way.
Key Takeaways
- Family loans and gifts both work for a down payment, but tax and mortgage-approval rules differ for each
- The IRS requires a minimum interest rate (the Applicable Federal Rate, or AFR) on family loans to avoid imputed interest and gift-tax issues
- Document the funds with a promissory note (loan) or a signed gift letter before lenders will count them
- Mislabeling a loan as a gift (or the reverse) can trigger IRS complications or a mortgage denial
What Is a Family Loan and How Does It Differ From a Gift
A family loan is money lent between relatives with a real expectation of repayment. A gift comes with no strings attached: no repayment, no interest, and no IOU.
Mortgage underwriters treat the two very differently:
- Loans may count as debt, affecting your debt-to-income ratio during underwriting
- Gifts, when properly documented, typically don't count against you at all
Why Mislabeling Is Risky
If a "gift" is actually expected to be repaid, and the lender finds out, it can look like undisclosed debt, a red flag that can stall or kill your approval. On the flip side, calling a large loan a "gift" to dodge documentation can create IRS reporting problems down the line.
Fannie Mae's guidelines are explicit here: personal unsecured loans are not an acceptable source for a down payment, closing costs, or reserves. If the money is a loan, it generally needs to be secured or properly structured before it can count toward your down payment.
Ways Family Members Can Help With a Down Payment
Relatives can help buyers in four common ways:
- Gift funds — outright cash, no repayment expected
- Cosigning — a relative adds their credit and income to strengthen the application
- Co-borrowing — a relative goes on the loan itself, sharing ownership and liability
- Family loans — formal, documented lending with interest and repayment terms
Gift Funds
Gifts under the annual gift tax exclusion (currently $19,000 per recipient as of 2025) don't require IRS filing. Larger gifts require the donor to file IRS Form 709, even when no gift tax is owed.
Fannie Mae allows gift funds for a primary residence or second home—not investment properties. The gift letter must state the donor's relationship, the amount, and confirm that repayment isn't expected.
Cosigning or Co-Borrowing
When a buyer's income or credit falls short, a relative's stronger financial profile can help close the gap. Cosigning backs the loan without ownership; co-borrowing puts the relative on the title and the note. Both routes carry real risk:
- The cosigner or co-borrower becomes legally liable for the mortgage
- Missed payments hit both parties' credit reports
- It can affect the relative's own borrowing capacity down the road
Family Loans
A family loan is documented debt with agreed interest and a repayment schedule—not a gift and not a credit guarantee. Lenders underwrite these differently from gift funds, so the note, rate, and paper trail matter. The sections below cover how to structure one that mortgage underwriters will accept.
How to Structure a Family Loan the Right Way
If you're going the loan route instead of a gift, structure matters. The IRS and your lender both need to see a legitimate arrangement, not an informal handshake deal.
Get it in writing. A bona fide loan needs a signed promissory note stating:
- The principal amount
- The interest rate
- The repayment schedule
- The maturity date
Without this, the IRS may not recognize it as real debt, and your lender almost certainly won't either.
Charge at Least the AFR
The IRS sets a minimum interest rate each month called the Applicable Federal Rate (AFR). As of September 2026, the annual-compounding rates were:
| Term | Rate |
|---|---|
| Short-term | 4.18% |
| Mid-term | 4.49% |
| Long-term | 5.12% |
If you charge below these rates, the IRS treats the difference as "imputed interest". That means the lender may owe tax on interest they never actually collected, and the foregone amount can be treated as a gift.
Secure It and Keep Records
A few extra steps strengthen the loan's legitimacy:
- Secure the loan with a deed of trust or mortgage lien on the property (this also offers estate-planning benefits)
- Keep repayment records: bank transfers, canceled checks, and a running payment ledger
- Document everything consistently so it doesn't look like informal forgiveness
Parents can legally forgive small amounts of interest or principal each year, within the annual gift tax exclusion, without violating the loan's terms. Just don't let that turn into a pattern of full forgiveness disguised as a real loan.
Because underwriting treatment of family loans varies by program, lender, and investor, it's worth talking through your specific situation with a mortgage advisor, such as ClearPoint Mortgage Advisors, before you finalize the paperwork.
Tax Rules Every Family Should Know Before Lending or Gifting
Taxes are where family loans and gifts get complicated fast. Here's what matters before you lend or gift.
Gift tax exclusion: For 2026, the annual gift tax exclusion is $19,000 per recipient. Married couples can "split" gifts, effectively doubling that to $38,000 per recipient, per year.
Lifetime exemption: Gifts above the annual exclusion count against the lifetime gift and estate tax exemption, which sits at $15,000,000 for 2026. Excess gifts get tracked via IRS Form 709, even when no tax is actually due.
Other rules that apply:
- Interest income is taxable. Interest charged on a family loan counts as taxable income to the lender.
- Below-market loans trigger imputed interest. Charge less than the Applicable Federal Rate (AFR), and the IRS treats the shortfall as a gift.
- Loan forgiveness is a gift in the year it happens, not when the loan originated. If parents forgive $50,000 in one year, that amount is treated as a gift made that year.
What Lenders Require: Gift Letters and Loan Documentation
Whether you go with a gift or a loan, your lender will want paperwork before counting the funds toward your down payment.
Gift Letter Requirements
A standard mortgage gift letter must include:
- Donor's name, address, and phone number
- Relationship to the borrower
- Dollar amount of the gift
- A clear statement that repayment isn't expected
Fannie Mae and Freddie Mac both require this documentation, plus evidence the funds actually moved: donor withdrawal slips, canceled checks, or wire confirmations to the closing agent.
Family vs. Friend Funds
One key distinction: gift funds from non-family friends are typically not allowed for conventional loans, while family-sourced gifts usually are. If a friend wants to help, that arrangement may need to go through a different structure entirely.
Family Loan Documentation
If the money is a loan rather than a gift, lenders usually want written proof of the debt:
- A signed promissory note with the loan amount and parties named
- Repayment schedule and any interest rate
- How the payment will count in your debt-to-income ratio
Family loans are treated as liabilities. That can lower the mortgage amount you qualify for, even when the relative is flexible about collecting payments.
Large Deposits and Seasoning
If a deposit shows up in your account that exceeds a certain threshold relative to your income, Fannie Mae's guidelines require you to document its source. Freddie Mac applies a similar lookback for deposits made close to your application date.
- Funds that sit in your account for a while before you apply tend to raise fewer questions
- Recently deposited large sums usually require a paper trail showing exactly where they came from
- Bank statements and transfer confirmations ready for underwriting cut down on last-minute delays
The safest move is to have the gift or loan proceeds land in your account well before you start the mortgage application process, and keep every transfer record.
Frequently Asked Questions
How much money can I borrow from a family member?
There's no legal cap on how much you can borrow. Larger amounts just require formal loan documentation and an IRS-compliant interest rate to avoid triggering gift tax exposure.
What is the lowest interest rate you can charge a family member?
The benchmark is the IRS Applicable Federal Rate (AFR), which updates monthly. Charging below it can create imputed interest and gift tax consequences for the lender.
What is the best way to lend money to a family member?
Use a written promissory note with AFR-based interest and a clear repayment schedule. Securing the loan against the property strengthens its standing with mortgage underwriters.
Is it okay to borrow money from a family member for a down payment?
Yes. It's common and generally accepted by lenders when the funds are properly documented as a formal loan or a signed gift letter.
What is a familial loan?
A familial loan is money lent between relatives with formal terms: a written agreement, an interest rate, and a repayment schedule. It's distinct from a no-strings-attached gift.
Do I have to pay taxes on a family loan used for a down payment?
The loan itself isn't taxed. However, any interest the lender collects is taxable income to them, and if a large portion is later forgiven, that forgiven amount may count as a gift.
