Lending Your Kid Money for a House: How to Do It Right

Helping a family member buy a home is one of the most significant financial gestures one person can make for another. It's also, if you're not careful, one of the most complicated — because a home purchase involves a mortgage lender, and mortgage lenders have strong opinions about where the down payment came from.

The good news: there's a clean way to do this. The less good news: most families don't know what it is, and the gap between "we worked it out" and "we did it right" can create real problems later — for the borrower's mortgage, for your taxes, and occasionally for the relationship.

Here's the full picture.

The thing the mortgage lender cares about

When someone applies for a mortgage, the lender looks carefully at the down payment. Specifically, they want to know: is this money a gift, or is it a loan?

The reason they care: a loan has to be repaid, which means monthly payments, which means a higher debt-to-income ratio, which affects how much mortgage the borrower qualifies for. A gift has none of that baggage — no payments, no obligation, no effect on DTI.

So lenders ask, and borrowers have to answer honestly. If your child tells their lender the money is a gift when there's an expectation of repayment, that's a misrepresentation on a federal mortgage application. Not a gray area. That's the one path through this that you don't want to take.

The right approach is to decide upfront, clearly and honestly, which one it is — and then structure it accordingly.

If it's a gift

A true gift — money you're giving with no expectation of repayment — is the simplest path from a mortgage standpoint. The lender will ask for a gift letter: a signed statement confirming that the money is a gift, that it doesn't need to be repaid, and often that the donor has the funds available. Your child's lender or loan officer can provide the exact template they need.

For the IRS, gifts above $19,000 per person per year (the 2025 annual exclusion — it adjusts most years) require filing a Form 709. You won't necessarily owe tax — the lifetime exemption is in the millions — but you may need to file. For a typical down payment gift, this is manageable paperwork, not a crisis.

If you're giving a gift, BankOfGaga isn't the tool for that. It's built for loans. But if you're on the fence about which path to take, read on.

If it's a loan

A family loan for a down payment is completely legitimate — but it has to be disclosed to the mortgage lender. What happens next depends on the lender and the loan program. Some lenders will allow it, with the monthly payment factored into the DTI calculation. Some programs (certain FHA or conventional guidelines) have stricter rules. Your child's loan officer can tell them exactly where things stand for their specific mortgage.

If the lender approves a family loan as part of the picture, here's what you need to have in place:

A written agreement. The lender may ask to see it. Even if they don't, you need it. Amount, interest rate, repayment schedule — the works. We've covered exactly what a family loan agreement needs to include if you want the clause-by-clause version.

An interest rate at or above the AFR. For any loan over $10,000 — and a down payment loan almost certainly clears that — the IRS requires at least their published minimum rate, the Applicable Federal Rate. Look it up here for the month you make the loan, pick the rate for your term, and write it in. We've got a full plain-English breakdown of the AFR if you want the details — the short version is that the rate is usually small, and charging it makes the IRS a non-issue.

A realistic repayment schedule. "Pay me back when you can" doesn't satisfy a lender, and it doesn't hold up over time. Monthly payments starting at a defined date is the standard. If you want to build in flexibility — say, payments don't start until six months after closing — put that in writing too.

Clean records from day one. Every payment logged. Running balance updated. Both parties able to see the current state of the loan at any time. (For the longer story of what happens when a family loan isn't kept clean, see our companion piece on undocumented family loans.)

The conversation worth having first

Before any paperwork, before any money moves: talk it through completely.

What happens if they can't make payments for a few months? What happens if the house gets sold before the loan is paid off — does the loan get repaid at closing? What if they refinance? What if circumstances change in ways neither of you can predict right now?

None of these questions have a wrong answer. They just need an answer — agreed on out loud, then written down. The families that have this conversation before the loan is made are the ones who don't have to have a harder version of it later. (For the full template of that conversation, see our piece on lending money to family without ruining Thanksgiving.)

What this looks like in practice

You lend your daughter $40,000 toward a home purchase. She discloses it to her lender, who approves the mortgage with the family loan factored in. You sign an agreement: $40,000 at the current AFR for a 10-year term, monthly payments starting 60 days after closing.

She gets the house. Payments start on schedule. Both of you can see the loan balance anytime. At tax time, you have a clean record of interest received. In ten years, she makes the final payment, and the loan is done.

That's a family doing something significant for each other, structured in a way that works for everyone — including the mortgage lender, the IRS, and the relationship.

BankOfGaga is built for exactly this: set up the loan once, and we handle the schedule, the payment tracking, the running balance, and the year-end record. Both the lender and the borrower see the same numbers at all times. Try it free for 14 days →

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Nothing here is legal, tax, or mortgage advice. Down payment rules vary by lender and loan program — your child's loan officer is the right person to ask about their specific mortgage. For the tax side, a CPA is worth the call if the loan is large or part of a bigger financial picture.