Loaning Money to Your Child for a House Down Payment

What parents need to know about lending money for real estate purchases.

What parents need to know about lending money for real estate purchases.

Your adult child wants to buy a house but needs help with the down payment. Here is how to structure the loan properly.

Gift vs. Loan: Mortgage Implications

Mortgage lenders care about where down payment money comes from.

If it is a gift: Lender will require a gift letter stating you do not expect repayment.

If it is a loan: The lender may count it as debt, affecting your child's debt-to-income ratio and possibly their approval.

Talk to your child's mortgage lender before deciding.

If It Is a Loan

Structure It Properly

For loans over $10,000, charge at least the Applicable Federal Rate (AFR) to avoid gift tax complications.

Put It in Writing

Include: - Loan amount - Interest rate (if any) - Repayment terms - What happens if they sell the house

Consider Timing

Some lenders require proof that down payment funds have been in the buyer's account for 60+ days. Plan ahead.

If It Is a Gift

The Gift Tax Exclusion

You can gift $18,000 per person per year (2024) without filing a gift tax return. A married couple can gift $36,000 together.

For amounts over this, you will need to file Form 709. You likely will not owe tax (lifetime exemption is over $12 million), but the paperwork is required.

Gift Letter Requirements

Mortgage lenders typically require a gift letter stating: - The amount - The relationship - That no repayment is expected

Protecting Yourself

Do Not Jeopardize Your Retirement

Only give or lend what you can afford to lose. Your child has decades to recover financially. You may not.

Consider a Promissory Note

For large loans, a formal promissory note creates a clear record and can help if there are ever disputes.

Address Multiple Children

If you have other children, consider how this affects them. Some parents deduct loans from inheritance shares.

Track Everything

Whether gift or loan, keep records: - Transfer receipts - Written agreements - Payment history (if a loan)

JimBondy can help track repayments if you structure it as a loan. Both you and your child see the same record.

Helping your child buy a home is wonderful. Just do it with clear terms and documentation.