Yes, you can borrow money from a family member to buy a house, either through a formal intrafamily loan (requiring repayment with interest) or as a gifted down payment. This can help cover down payments or closing costs, but it must be documented to satisfy mortgage lender requirements and IRS regulations.
However, most mortgage lenders will not allow gifts from friends or non-family members to be used for a down payment. Acceptable sources of gift money for a conventional loan include anyone related to the borrower by blood, marriage, adoption or legal guardianship.
For a family loan, draft a promissory note outlining the loan amount, interest rate, repayment schedule, and term. Both lender and borrowers should sign the document. Notarization is recommended to verify signatures and enhance enforceability. Clearly state if interest is deferred or applied after three years.
FHA gift funds are assets given from a donor to a borrower via cash or equity with no expectation of repayment. As a borrower, you can use FHA gift funds toward a down payment, closing costs or housing reserves to qualify for an FHA mortgage.
There may be tax implications.
Otherwise, the money is considered income that you can be taxed on. If your family member or friend doesn't charge the AFR, the IRS may also tax them on interest that could have been collected but wasn't. However, if it's a small loan less than $10,000, the IRS doesn't require interest.
Any interest you charge on the loan is subject to income tax and you must declare this on your self-assessment tax return. The tax you pay on it will depend on your income tax bracket.
More first-time homebuyers are turning to loved ones to secure loans to purchase a new home. Everyone legally can borrow from family and friends if both parties are willing. If homeowners handle loaning money correctly, everyone can end up winning.
While family members can charge interest rates below current market rates, the applicable federal rate is the minimum interest the lender can charge for loans more than $10,000. If you charge less than this rate, you'll have to pay taxes on the unearned interest.
Yes, you can gift your son $100,000, but since it's over the 2025 annual exclusion of $19,000, you'll need to file a gift tax return (Form 709), though you likely won't owe taxes unless you've already used up your large lifetime exemption (over $13.99 million in 2025). Your son pays no tax on the gift, but you, as the giver, must report the amount exceeding the annual limit, which counts against your lifetime exemption.
To prove money was a gift, the best method is a signed gift letter, often required by lenders, detailing the donor, recipient, amount, relationship, and stating it's not a loan, supported by a paper trail like canceled checks or bank statements showing the source of funds and transfer. This documentation proves the money came from the donor's funds and was freely given, preventing it from being classified as a loan that needs repayment.
When someone makes a gift, they do not expect repayment. When someone makes a loan, there is an expectation of repayment. The identification or classification of whether monies advanced are a gift or a loan impacts upon both equitable distribution and support determinations in a divorce action.
The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate.
While some lenders may allow you to use a personal loan for a down payment on a house, it's generally not recommended since it increases your debt-to-income (DTI) ratio. Many mortgage lenders don't view this approach favorably, and it may hurt your ability to qualify for a loan.
According to Fannie Mae, gift money for a down payment on a conventional loan can only be provided by: A relative, such as your spouse, child, or other dependent, or any other individual who is related to you by blood, marriage, adoption, or legal guardianship.
The $10,000 Loophole.
To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $10,000 or less. In that case, you can charge an interest rate below the AFR, and there won't be any federal tax consequences — even if you charge no interest.
The IRS primarily learns about large gifts when you file Form 709, the Gift Tax Return, for amounts exceeding the annual exclusion (e.g., $19,000 per person in 2025). They can also discover gifts through third-party reporting (banks reporting large cash transfers), audits of your estate, or by matching transactions to public records, especially for significant asset transfers like property, which might trigger property tax reassessments.
A family loan can have tax implications, but whether it is considered taxable income depends on the nature of the transaction. The IRS generally views a loan as non-taxable if it is a genuine debt with an expectation of repayment.
Disadvantages
Do I pay tax if I gift someone money or an asset, like a house? If you gift money to a friend or family member there are no tax implications for you or the receiver. If you gift someone an asset like a house, we consider that transaction to be the same as you selling the house, and capital gains tax (CGT) will apply.