In today’s housing market, buying a first home often takes more than savings and determination. Higher home prices, elevated borrowing costs, and tight inventory have many families looking for thoughtful ways to help adult children or relatives become homeowners sooner.
The right strategy depends on the family’s goals, the buyer’s readiness, and how much flexibility or formality everyone wants. Below are several common approaches, along with key planning issues to consider before money changes hands.
Common Approaches to Help a Child or Relative
- Down Payment or Closing Cost Gifts
A cash gift can be one of the simplest ways to help. Parents or relatives may contribute toward a down payment, closing costs, or both. Mortgage lenders typically require a gift letter confirming the amount, relationship, property address, and that repayment is not expected. They may also ask for documentation showing where the funds came from and when they were transferred.
From a tax standpoint, the recipient generally does not treat a gift as taxable income. Gift tax rules apply to the donor. For 2026, the annual federal gift tax exclusion is $19,000 per recipient (and can be doubled for married couples using gift-splitting rules, depending on circumstances). Gifts above the annual exclusion often require filing a gift tax return, though many donors still owe no out-of-pocket tax due to the lifetime exemption (rules vary by situation).
- Gifts of Equity
A gift of equity occurs when a home is sold to a family member for less than fair market value. For example, if a home worth $450,000 is sold to a child for $350,000, the $100,000 difference may be treated as a gift. This can reduce the buyer’s cash needed at closing and make the purchase more affordable.
Because this strategy involves both a sale and a gift, families should coordinate with the mortgage lender, tax professional, and attorney before setting the price or signing documents. The seller may have gift tax reporting considerations, and both parties should understand how the transaction could affect basis and future capital gains planning.
- Family Loans
Rather than making an outright gift, a family member may lend money to the buyer for part or all of the purchase in the form of a loan. A family loan can provide flexibility, keep interest payments within the family, and preserve the lender’s right to repayment. It can also help when the buyer is still building credit or does not fit neatly into traditional underwriting standards.
The key is to treat the loan like a real loan. Families should document the terms in writing, charge an appropriate interest rate, establish a repayment schedule, and keep payment records. If repayment is not truly expected, or the arrangement is informal, the IRS or a mortgage lender may view it as a gift rather than debt.
Additional Family Loan Considerations
When a family loan charges little or no interest, the tax rules become especially important. If a parent lends $300,000 to a child at 0% interest, the IRS may treat the foregone interest as if it were paid, potentially creating phantom interest income and/or a deemed gift. That is the core risk of “handshake” family mortgages: even good intentions can accidentally create tax complexity. Charging at least the IRS Applicable Federal Rate (AFR) helps show the transaction is a legitimate loan rather than a disguised wealth transfer.
The IRS Applicable Federal Rate (AFR) is a set of IRS-published minimum interest rates used to evaluate whether a private loan is “below market.” The IRS publishes AFRs monthly, and families typically “lock” the rate that applies in the month the loan is made, based on the loan term and compounding convention. AFRs are organized by loan term: Short-term: up to 3 years; Mid-term: more than 3 years up to 9 years; and Long-term: more than 9 years.
Common Uses of Family Loans
Replace a Bank Mortgage
A family member can act as the lender and fund the home purchase fully or partially, often at a rate that meets AFR requirements while remaining attractive relative to commercial bank rates. The borrower may pay less interest than with a bank mortgage, while the lender receives interest income that is generally reported on their tax return.
Use AFR as a Wealth-Transfer Tool
Intra-family loans can shift potential growth to the borrower when home appreciation or investment growth outpaces the AFR interest rate. This is often discussed in estate planning because the borrower keeps the upside above the loan rate, while the lender retains the right to repayment of principal.
Blend AFR Loans with Annual Gifting
Some families structure a compliant AFR loan and then use annual gifts, within annual exclusion limits, to help the borrower make payments or reduce principal over time. This creates a disciplined framework while still allowing ongoing support.
Planning Well
Helping a family member buy a home is more than a financial decision. It can be a meaningful way to support the next generation, but the structure matters. A clear plan helps define whether the support is a gift, a loan, an advance on inheritance, or part of a broader family wealth strategy.
Before moving forward, families should consider whether the support is affordable, how it may affect other beneficiaries, and what should happen if circumstances change. These conversations can prevent misunderstandings and help ensure the arrangement supports long-term stability.
At its best, this kind of planning is about more than moving money from one generation to the next. It is about helping family members feel supported, setting expectations with care, and making sure generosity strengthens relationships rather than complicates them.
We have seen thoughtful family support arrangements work beautifully when they are designed with clarity, care, and the right professional guidance. If you are considering helping a loved one purchase a home or undertake a renovation, we would be happy to help you evaluate the options, understand the planning considerations, and structure an approach that supports both your financial goals and your family relationships.
