If a family member asks you to help fund a home purchase, your first instinct is probably to say yes. That instinct could cost you six figures — and Thanksgiving dinner for the next decade. Lending money to family for real estate is one of the most financially and emotionally consequential decisions you’ll ever make, and most people walk into it with nothing more than a handshake and good intentions. Here’s what you actually need to know before writing that check.
The IRS Is Watching — Even If Nobody Else Is
The moment you hand a family member a large sum of money, the IRS has an opinion about it. If you structure the transfer as a loan, you must charge at least the Applicable Federal Rate (AFR) of interest, published monthly by the IRS. Charge less — or charge nothing — and the IRS can impute interest, meaning they’ll tax you on income you never actually received. For 2024, the AFR on a long-term loan sits around 4.5%, depending on the month and compounding period.
If you intend to make a gift instead, know the limits. In 2024, you can give up to $18,000 per recipient without triggering a gift tax return. Married couples can combine their exclusions to give $36,000. Anything above that eats into your lifetime estate and gift tax exemption ($13.61 million in 2024). That exemption is scheduled to be roughly cut in half after 2025 unless Congress acts, so large gifts made now carry long-term planning implications you should discuss with a tax professional.
Here’s the critical point most families miss: if you call it a loan but have no written agreement, no interest rate, and no repayment history, the IRS — and any court — will treat it as a gift. You cannot retroactively convert a gift into a loan when things go sideways.
Gift vs. Loan: Pick One and Document It Properly
Lenders underwriting your family member’s mortgage will demand to know the nature of your contribution. If it’s a gift, they’ll require a signed gift letter stating no repayment is expected. If it’s a loan, it counts as debt — and that directly impacts the borrower’s debt-to-income ratio, potentially torpedoing their mortgage approval. This puts families in a bind: calling the money a “gift” to help with qualification, then privately expecting repayment. That’s not a gray area — it’s mortgage fraud, and it can unwind the entire transaction.
Choose honestly. If it’s a loan, formalize it with a promissory note that includes the principal amount, interest rate (at or above AFR), repayment schedule, late payment terms, and default provisions. If it’s a gift, accept that the money is gone. Half-measures create legal nightmares.
Secure Your Interest — Literally
An unsecured promissory note is better than nothing, but it’s still a piece of paper backed by nothing but your relative’s word. If the borrower defaults on their primary mortgage and the home goes to foreclosure, unsecured lenders get paid last — which in practice often means never.
If the amount is substantial, consider recording a deed of trust or mortgage (depending on your state) that gives you a secured lien on the property. This won’t give you priority over the primary mortgage lender, who will hold the first lien position, but a second lien position is dramatically better than no position at all. You’ll need a real estate attorney to draft and record this properly — budget $500 to $1,500 for the work, and consider it money well spent.
What Happens When Life Intervenes
Divorce. If your borrower gets divorced, that home becomes a marital asset subject to equitable distribution (or community property division in states like California, Texas, Arizona, Nevada, Washington, Idaho, Louisiana, New Mexico, and Wisconsin). Without documentation, a divorce court may classify your “loan” as a gift to the marital estate. A recorded lien protects you; a verbal agreement does not. In community property states, a spouse may acquire an interest in the home simply by being married to the borrower — regardless of whose name is on the deed.
Bankruptcy. If the borrower files for bankruptcy, a trustee will scrutinize transfers between family members. Payments made to you in the year before filing can be clawed back as preferential transfers to insiders. A properly documented and secured loan, originated well before any financial distress, gives you the strongest defensive position.
Death. If the borrower dies, an undocumented loan dies with them. You have no enforceable claim against the estate. A recorded lien, by contrast, must be satisfied before the property transfers to heirs.
The DTI Trap Most Families Never See Coming
Here’s a scenario that catches families off guard: you lend your son $80,000 for a down payment, structured as a formal loan with monthly repayments. Three years later, your son wants to buy a second property or refinance. That $80,000 loan — even if payments are current and modest — counts against his debt-to-income ratio on every future mortgage application. Conventional lenders typically want total DTI below 43-45%. Your family loan may be the thing that pushes him over the edge and kills the deal. Discuss this reality upfront so nobody is blindsided later.
Tax Season: The 1098 Problem
If your family member takes out a mortgage alongside your family loan, the lender issues IRS Form 1098 — the mortgage interest statement — under one Social Security Number. Only the person whose SSN appears on that form can straightforwardly claim the mortgage interest deduction. If multiple family members are contributing to mortgage payments or expecting tax benefits, you need a written agreement specifying who claims what. Disagreements over a $4,000 deduction have destroyed relationships that survived far bigger tests.
Your Loan Agreement Checklist
Whether you use an attorney or draft the document yourselves (an attorney is strongly recommended for amounts over $25,000), your agreement should address:
- Exact loan amount, disbursement date, and interest rate (at or above AFR)
- Repayment schedule — monthly, quarterly, balloon payment, or on sale of the property
- Late payment penalties and grace periods
- Default provisions — what constitutes default and what remedies are available
- Whether the loan is secured by a lien on the property
- Prepayment rights — can the borrower pay it off early without penalty?
- What happens upon sale of the property, refinancing, death, divorce, or bankruptcy
- Dispute resolution — mediation before litigation can save the relationship and the legal fees
The Hardest Advice: When to Say No
If lending the money would compromise your own retirement security, the answer is no. Full stop. You cannot take out student loans for retirement. Your child can find alternative paths to homeownership — FHA loans with 3.5% down, down payment assistance programs, shared equity arrangements with state housing agencies. You cannot un-retire.
If the borrower has a history of financial instability, saying yes doesn’t help them — it enables the next crisis while putting your own assets at risk. Love and lending are not the same thing, and conflating them is how families end up in court.
Before any money moves, sit down together with a real estate attorney and, ideally, a financial planner who works on a fee-only basis. Spend the $1,000–$2,000 it costs to get proper documentation. It is the cheapest insurance you will ever buy for both your finances and your family.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial or legal advice. Laws and lending criteria vary significantly between states. We always recommend consulting with a qualified real estate attorney and financial advisor before entering into a property purchase or financial arrangement with another party.
