The three ways to help
Every family arrangement for a house comes down to one of three structures — or a mix of them:
- An outright gift. The money changes hands with no repayment expected, documented for the child's mortgage lender with a gift letter. Simple, but it draws on gift-tax allowances and the money is gone.
- An unsecured family loan. A promissory note at a fair rate, but no lien on the house. Easy to set up; keeps repayment expectations real; the borrower gets no mortgage-interest deduction.
- A secured intra-family mortgage. The same note, plus a mortgage or deed of trust recorded against the property. More setup, but it protects the lender's position and can make the interest deductible for the borrower.
| Cost to set up | Tax picture | Control & repayment | What the mortgage lender thinks | |
|---|---|---|---|---|
| Outright gift | Nearly nothing — a gift letter | Over $19,000 per recipient: Form 709 filing, uses lifetime exemption | None — the money is gone by design | Welcome, with a signed gift letter and paper trail |
| Unsecured loan | A promissory note | Interest at the AFR or above; taxable income to the lender; no deduction for the borrower | Repayment owed, but no claim on the house | Counts as debt; often not allowed as the down payment |
| Intra-family mortgage | Note + recorded lien; sometimes an attorney or servicer | Same AFR floor; interest may be deductible for the borrower | Strongest — a legal claim on the property | If it replaces the bank, there is no bank; as a second lien, the bank must approve it |
Not sure which side of the gift/loan line you're on? The gift-or-loan decision tool asks the deciding questions in about a minute.
If you gift: the gift-letter rules
Mortgage lenders like gift money — it lowers the loan they have to underwrite — but they require it to be a true gift. The standard gift letter states the amount, the relationship, the property, and one load-bearing sentence: no repayment is expected or required. The lender will usually also want to see the money's path — your account statement showing the withdrawal and the deposit into the buyer's account.
Take that sentence seriously. Signing a gift letter for money you privately expect back misstates the buyer's debts on a federal mortgage application. If you expect repayment, structure it as a loan and disclose it — that's what the other two options are for.
On the tax side: gifts up to the annual exclusion — $19,000 per recipient in 2026 — need no filing at all. Two parents can each give $19,000, and give to the child's spouse as well, so a married couple helping a married child can move up to $76,000 in a year with no paperwork beyond the gift letter. (If one spouse funds the whole gift and you elect to split it, a Form 709 is generally required to record the election — the gift-splitting guide covers when.) Above the exclusion, you file Form 709 and the excess draws down the lifetime exemption — roughly $15,000,000 per person in 2026 — so tax is rarely owed, but the filing is not optional. The free gift-letter generator produces a lender-ready letter, and the gifting & gift tax guide covers the 709 side in full.
If you lend unsecured: the AFR floor
A family loan needs interest at or above the Applicable Federal Rate — the minimum rate the IRS publishes for the loan's term. For July 2026, under Rev. Rul. 2026-12, the annual rates are 4.00% short-term (up to 3 years), 4.35% mid-term (over 3 up to 9 years), and 4.98% long-term (over 9 years). The IRS updates AFRs monthly — check the current month's rates before signing anything.
Lend below the AFR and section 7872 steps in: the interest you didn't charge is "forgone interest," treated as a gift to the borrower, and can be imputed back to you as income anyway. Two exceptions matter at house scale, mostly by showing how small they are: loans of $10,000 or less between individuals are generally exempt outright, and for loans up to $100,000 the interest imputed as income to the lender is capped at the borrower's net investment income (treated as zero if that income is $1,000 or less). Useful for a modest bridge loan; no help on a six-figure house note. The imputed-interest calculator shows exactly what a below-AFR rate would create.
One more thing an unsecured note cannot do: give the borrower a mortgage-interest deduction. Under IRS Publication 936, deductible home-mortgage interest requires a secured debt — an instrument that makes the home collateral and is recorded or otherwise perfected under state law. A plain promissory note, however well drafted, fails that test. The borrower repays with after-tax dollars either way; the lender still reports the interest as income.
If you do a real intra-family mortgage
To make the loan a genuine mortgage, two documents do the work: the promissory note (the promise to repay, with the rate and schedule) and a mortgage or deed of trust (the lien), signed and recorded with the county where the property sits. Recording is what perfects the lien — it protects the lender if the house is sold or refinanced, and it is the step that can make the interest deductible for the borrower, provided they itemize and the debt fits within the acquisition-debt limit ($750,000 for debt incurred after December 15, 2017).
The mechanics, at a high level: the note and lien are prepared, the deed or trust instrument is signed at closing (a title company or real-estate attorney typically handles execution and recording for a modest fee), the homeowner's insurance lists the family lender as a lienholder, and payments run on a real amortization schedule. Each year the lender reports the interest received as income and the borrower claims the deduction if they itemize.
When is professional help worth it? Almost always for the recording itself — an unrecorded "mortgage" is just an unsecured note with extra pages. Beyond that: if the family loan sits behind a bank loan as a second lien, the bank's program has to allow the secondary financing; if the property is out of state, local recording rules vary; and if nobody in the family wants to chase payments, a servicer earns its keep. National Family Mortgage is the established fee-based option here — it prepares and records real-estate-secured family loan documents and offers optional loan servicing with IRS reporting support. Its current fees aren't published on its public pages, so ask directly and weigh the quote against a local attorney's.
Before committing to a term, run the numbers. The Family Loan Calculator shows the payment and total interest at the correct AFR for your term — and flags the gift created if the rate is too low.
Mixing: gift the down payment, lend the rest
The structures combine well, and the most common pattern is exactly this: gift the down payment, lend the balance.
An illustration with 2026 numbers. A daughter is buying a $450,000 house with $20,000 of her own savings. Her married parents:
- Gift $38,000 toward the down payment — $19,000 from each parent, inside the annual exclusion, so no Form 709 is needed and no lifetime exemption is used. Down payment: $58,000, about 13%.
- Lend the remaining $392,000 as a recorded 30-year intra-family mortgage at 4.98% — the July 2026 long-term annual AFR. The payment works out to roughly $2,100 a month, with about $19,400 of interest in the first year: taxable income to the parents, and potentially deductible for the daughter since the loan is secured, recorded, and under the $750,000 cap.
Whether that beats her bank quote depends on the month's rates on both sides — but every interest dollar she pays goes to her parents rather than a bank, and the parents keep a recorded first-lien claim on the property. The same pattern scales down: gift within the exclusions, lend only the part you genuinely expect back.
What lenders will ask for, either way
If a bank mortgage is part of the picture, expect its underwriter to look at family money closely:
- For gifts: a signed gift letter, proof of the donor's funds, and the transfer trail. Money that has sat in the buyer's account for a couple of statement cycles ("seasoned" funds) usually draws fewer questions.
- For loans: full disclosure. A family loan is debt — it goes into the buyer's debt-to-income ratio, and if it's secured against the same house, the bank must approve the secondary financing under its program's rules. Many programs won't accept a borrowed down payment at all.
- Never blur the two. The one unforgivable move is calling a loan a gift on the lender's forms. Pick a lane, paper it properly, and disclose it.
If the family loan replaces the bank entirely, there's no underwriter to satisfy — which is exactly why the family should run its own version of underwriting: a real note, a real schedule, a recorded lien, and payment records from day one.
Keeping it fair with siblings
House help is where sibling math gets tense, because the numbers are big and the forms differ: one child got a $38,000 gift, another got a $392,000 loan at 4.98%, a third got nothing yet. A gift and a loan are not the same thing — a loan comes back with interest — but only if the loan is actually repaid, and only if someone keeps the record. The families that stay comfortable are the ones where the help is written down: who received what, in which form, on what terms, and where it stands today. A running record also catches the quiet conversions — a loan that stops being repaid and is eventually forgiven has become a gift, and belongs in the gift record (see forgiving a family loan). The free gift ledger is a starting point for the gift side; the gift tax calculator shows what any year's gifts mean for the 709 worksheet.
The paperwork checklist
Whichever structure you choose, this is the pile that makes it real:
- Gift route: a signed gift letter (generate one free), the transfer records, and — if any recipient got more than $19,000 from one donor — a Form 709 for that year.
- Loan route: a written promissory note with parties, amount, rate, and schedule — the free promissory-note generator builds an editable one from your details — plus an amortization schedule at or above the month's AFR.
- Mortgage route: all of the above, plus the mortgage or deed of trust, proof of county recording, and the lender listed on the homeowner's insurance.
- Every route: payment records. Actual transfers, dated, matched against the schedule, kept where both sides can see them — because a "loan" with no payment history looks like a gift to everyone, including the IRS.
- Every year: the lender reports interest received as income; the borrower claims the deduction only if the loan is secured and recorded.
Free tools for the house decision
Run the numbers and build the paperwork before anyone writes a check.
Common questions
Can the down payment itself be a loan from parents?
Only if it's disclosed. Mortgage programs generally require gift funds to be genuinely free of repayment, and borrowed down payments must be declared and meet the lender's secondary-financing rules — many programs don't allow them. Never sign a gift letter for money you expect back.
Do parents have to charge interest on a family mortgage?
Above the small-loan exceptions, yes — at least the AFR for the loan's term (4.98% annual for loans over 9 years in July 2026; the IRS updates the rate monthly). Charging less makes the forgone interest a gift under section 7872, and it can be imputed back to the lender as income.
Can my child deduct the interest they pay me?
Only if the loan is a true mortgage — secured by the home and recorded or otherwise perfected under state law — and the child itemizes deductions. Interest on an unsecured family note is never deductible, though the lender reports it as income either way.
This guide is general information, not tax, legal, or financial advice. AFR and gift rules change; verify current figures with the IRS and consult your CPA or attorney before structuring a loan.
Whichever way you help, keep the record straight.
Only you lend the money. Family Matters documents the note and logs every payment — it never lends or fronts a dime. The schedule at the right rate, every payment tracked through connected accounts, and a record both sides — and the siblings' ledger — can trust.
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