The combination of higher down payments and higher monthly payments has made it much more difficult to purchase a home. In fact, the average age of first-time home buyers is now between the ages of 35 and 40. Some parents see this challenge for their children and want to step in to help.
Down Payment Assistance
As housing prices have increased, the down payment amounts have increased as well. Borrowers may be able to afford the monthly mortgage payments but need help building up their down payment savings. Good news! Parents can gift up to $19,000 (2026 limit) per person per year without any gift reporting or tax liability.
For example, a married couple can gift up to $19,000 each, for a total of $38,000, to their son/daughter. Together, they can gift another $38,000 to their child's partner for a total of $76,000. Parents should write separate checks to their son/daughter and their partner to ensure it is very clear that the amounts are within the annual gift limit. There will be a few extra steps taken in the underwriting process to trace the gifts, so buyers should also let their lenders know about the incoming gifts right away.
Intrafamily Loans
Intrafamily lending is simply a loan between family members. No bank, institutional underwriting, or credit scores are needed. But it does have to be more than a handshake deal. If the loan isn't structured properly, the IRS could view the transaction as a gift and come knocking at your door.
To be recognized as a loan by the IRS, the arrangement must include the following elements:
- a written promissory note,
- repayment plan,
- charged interest,
- loan maturity date, plus
- the lender must have collateral,
- the borrower must have the means to repay the loan, and
- the lender/borrower must maintain records.
The IRS even sets the minimum interest rate. Even with all these requirements, the process can still be fairly straightforward.
To ensure your promissory note includes all necessary details, you should contact an attorney to draft the document. Of course, you could also write up the note yourself, but the IRS could view the loan as a gift in disguise if it doesn't include all the required details.
Next, you'll need to determine the key terms of the loan. Since no underwriters or banks are involved, you can customize the term and payment structure. For example, payments could be lower in the first few years of the loan term and increase over time.
You do have to refer to the IRS when setting the interest rate. The Applicable Federal Rate (AFR) table, updated monthly by the IRS, breaks minimum interest rates into three buckets based on loan term.
- Short-term loans are less than three years.
- Mid-term loans are between three and nine years.
- Long-term loans are more than nine years.
For example, the long-term loan rate for loans established in May of 2026 is 4.87%. Compare that to a 6.5% rate on a 30-year mortgage, and you can see why the intrafamily loan might be worth exploring for the borrower.
Depending on how the parents are currently investing the funds earmarked for the loan, a guaranteed 4.87% might not look too bad when comparing other conservative investments. You can set your interest rate above the AFR rates, but not below them.
When the loan exceeds $10,000, the interest received by the parents should be reported on a 1099-INV and included on their tax return. The borrower can deduct the interest expense on Schedule A of their tax return.
Loan Forgiveness
What about forgiving the loan? The parents can choose to forgive the loan, but the unpaid balance will be treated as a gift for gift and estate tax purposes. The borrower may also owe taxes on the unpaid interest.
The intangible element that hasn't been mentioned is the impact on family dynamics. Would lending money to a family member create tension or cause more significant issues? Conversely, what if the borrower isn't able to pay back the loan in full? Think through worst-case scenarios before making any commitments.
Bottom Line
Parents want the best for their children and helping them with a home purchase may feel like the right thing to do. However, parents need to review their own financial security before opening up their checkbook. Otherwise, everyone might end up living together!
Schedule a Consultation
We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
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