Lending Money to Family for a Home Purchase: What You Need to Know

Buying a home is a big financial step—and for some buyers, especially first-timers, getting a little help from family can make all the difference. If you’re in a position to lend money to a family member for their home purchase, it can be a beautiful way to support their dreams. But, like any financial arrangement, it’s important to go in with open eyes, clear expectations, and the right documentation.

Here’s what you should know before becoming the Bank of Mom, Dad, or Favorite Aunt.

1. Loan or Gift? Be Clear on Intentions

The first question is simple but crucial: is this a loan or a gift?

Gift: If you're giving the money and don’t expect repayment, you may need to file a gift tax return if the amount exceeds the annual IRS gift tax exclusion limit ($18,000 per person for 2024).

Loan: If you’re lending the money and expect it to be repaid over time, you'll want a formal agreement in place—and that’s not just good advice, it’s a requirement if your relative is also applying for a mortgage.

2. Put It in Writing

No matter how close your relationship is, always document the loan. This protects both you and your loved one and helps avoid any misunderstandings down the road.

Create a promissory note that outlines:

• Loan amount

• Interest rate

• Repayment schedule

• Late fees (if any)

• What happens in case of default

You can use online templates or work with an attorney to make sure everything is legally sound.

3. Charge a Minimum Interest Rate

Yes, even if you don’t want interest, the IRS still expects it. If you lend money interest-free or at a very low rate, the IRS may consider the "forgone interest" to be a gift, which could trigger gift tax consequences.

To stay in the clear, charge at least the Applicable Federal Rate (AFR), which is published monthly by the IRS. It’s usually much lower than commercial rates, so your family member still gets a great deal.

4. Understand the Mortgage Lender’s Perspective

If your family member is getting a traditional mortgage in addition to your loan, their lender will likely scrutinize your contribution. They may require:

• A formal loan agreement

• Proof that the loan is not a gift (if that’s the case)

• Evidence of your financial ability to lend

Some lenders may even require your loan to be subordinate to theirs, meaning their mortgage takes priority if the home is ever foreclosed.

5. Consider Tax Implications (For Both Sides)

Interest Income: If you're charging interest, that’s considered taxable income and needs to be reported on your tax return.

Gift Reporting: If you end up forgiving the loan or part of it, that may be treated as a gift—again, something to consider with your CPA.

Capital Gains: If you end up taking ownership of the home due to default or other issues, that could complicate your own tax situation.

Always check with a tax advisor before finalizing your loan terms.

6. Set Expectations for Repayment

Family and money don’t always mix easily. To preserve relationships, talk openly and honestly about expectations. If circumstances change—maybe your family member loses a job or decides to refinance—agree on how you’ll handle it.

This isn’t just about the money. It’s about trust, responsibility, and ongoing communication.

7. Protect the Relationship

At the end of the day, the relationship is more important than the money. Make sure you both understand what this loan represents and how you’ll handle bumps along the way.

Tip: If you’re uncomfortable asking for repayment directly, consider using a loan servicing company to handle payments and reminders.

Final Thoughts

Lending money to a loved one to help them buy a home can be a generous, life-changing gift—but it’s not without its complexities. By documenting everything, understanding tax and legal implications, and keeping the lines of communication open, you’ll set both yourself and your family member up for a successful experience.

And if you ever need help navigating the home buying journey—whether you're the borrower or the generous lender—I'm here to help.