Can I Borrow Money From Family for Down Payment?

Seeking financial assistance from family for a home’s down payment is common. While generally permissible, this strategy involves specific requirements and implications that, when understood, can ensure a smoother mortgage application and avoid complications.

Deciding Between a Gift and a Loan

The distinction between a gift and a loan from a family member is significant for mortgage lenders. A gift implies no repayment expectation, so it does not affect the borrower’s debt-to-income (DTI) ratio. Lenders prefer gifts as they do not add to financial obligations.

Conversely, a family loan creates a debt obligation, directly impacting the DTI ratio. This ratio, comparing monthly debt payments to gross monthly income, determines mortgage eligibility and the maximum loan amount. A higher DTI ratio could reduce the amount a lender provides or prevent mortgage approval.

The choice also carries implications for the family member providing funds. Gifts may be subject to federal gift tax rules, while loans require formal documentation and may have income tax consequences for the lender. Understanding these differences is essential for both parties to make an informed decision aligning with their financial goals and tax obligations.

Using Gifted Funds

When a down payment is a gift, mortgage lenders require clear documentation to confirm the funds are a gift, not a disguised loan. The primary document is a gift letter.

A valid gift letter includes the donor’s full name, address, relationship to the borrower, the exact dollar amount, transfer date, and property address. It must state no repayment is expected. The donor often provides fund source, such as account numbers. Lenders may also require donor bank statements to verify fund sufficiency and transfer to the borrower’s account.

Eligible donors include immediate family members: spouse, child, other dependent, or individuals related by blood, marriage, adoption, or legal guardianship. Some loan programs (e.g., FHA or VA loans) may allow gifts from a wider range of sources, including close friends or employers, provided they are not “interested parties” who would profit from the transaction (e.g., seller or real estate agent).

The IRS imposes gift tax on the donor, not the recipient. For 2025, an individual can gift up to $19,000 per recipient without gift tax liability or reporting under the annual gift tax exclusion. Married couples can jointly gift up to $38,000 to each recipient without reporting. If a gift exceeds this, the donor must report it to the IRS using Form 709. Most donors will not owe federal gift tax unless their total lifetime gifts surpass the lifetime gift tax exemption ($13.99 million per individual for 2025).

Using Loaned Funds

If a family member provides down payment funds as a loan, it must be structured as legitimate debt with defined repayment terms to satisfy mortgage lenders. This involves a formal promissory note or loan agreement. The agreement should outline the loan amount, interest rate, repayment schedule, and default terms. Without documentation, the IRS might consider it a gift, triggering gift tax rules for the lender.

A family loan directly impacts the borrower’s debt-to-income (DTI) ratio, a metric lenders use to assess repayment capacity. The monthly payment obligation will be added to other debts, potentially affecting mortgage eligibility or the amount they can borrow. Lenders scrutinize DTI to ensure the borrower can manage all financial obligations, including the new mortgage payment.

The family member acting as the lender has specific tax obligations. Any interest received is taxable income, reportable on their tax return. If the loan is interest-free or charges below applicable federal rates (AFR) set by the IRS, the IRS may impute interest. This means the lender could be taxed on imputed interest, even if not received, and the forgone interest might be considered a taxable gift to the borrower. Loans under $10,000 are generally exempt from these imputed interest rules.

Mortgage Application Requirements

Once the decision between a gift or a loan is made and documentation prepared, the mortgage application requires careful submission and verification of these funds. Lenders must verify the origin and legitimacy of the down payment money. This ensures compliance with anti-money laundering regulations and confirms funds are not borrowed from undisclosed sources.

Borrowers provide bank statements covering the most recent 60-day period for accounts holding down payment and closing costs. These statements must identify the financial institution, account holder, and include a detailed record of all transactions. If large or unusual deposits appear, lenders require further documentation (e.g., gift letter or promissory note) to explain the source.

The lender reviews the gift letter or promissory note, along with bank statements, to ensure compliance with underwriting guidelines. This includes verifying gifted funds have no repayment expectation and family loans are structured appropriately and accounted for in the borrower’s debt-to-income ratio. This review impacts mortgage approval, assuring the lender of the borrower’s financial capacity and the legitimacy of the down payment funds.