Can My Parents Give Me Money to Buy a House?

Financial assistance from parents can significantly ease the burden of a down payment or closing costs for homebuyers. While such gifts are often given with good intentions, understanding the associated financial and tax implications for both parents and children is important. Navigating these aspects carefully can help ensure a smooth transaction.

Federal Gift Tax Implications for Parents

The Internal Revenue Service (IRS) sets an annual gift tax exclusion, which is the amount an individual can give to any other person each year without incurring gift tax implications or reporting requirements. For 2025, this annual exclusion is $19,000 per recipient. If both parents contribute, they can collectively gift $38,000 to their child in 2025 without triggering reporting obligations. This annual exclusion applies per recipient, allowing parents to give separate gifts to their child and their child’s spouse without exceeding the limit for each individual.

For gifts exceeding the annual exclusion amount, parents are required to file IRS Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return.” Filing this form does not automatically mean a gift tax is owed. Instead, the amount exceeding the annual exclusion reduces the donor’s lifetime gift tax exemption.

The lifetime gift tax exemption for 2025 is $13.99 million per individual. For married couples, this effectively doubles to $27.98 million. Gift tax becomes payable only if the cumulative total of taxable gifts made over a lifetime exceeds this substantial exemption. The responsibility for filing Form 709 and any potential gift tax liability rests solely with the donor, not the recipient. Form 709 must be filed by April 15th of the year following the calendar year in which the gift was made.

How a Gift Impacts Your Mortgage Application

Receiving a financial gift can help a homebuyer secure a mortgage, particularly for the down payment. Lenders scrutinize the source of these funds to ensure they are a gift and not a hidden loan. A disguised loan could affect the borrower’s debt-to-income ratio, a key factor in mortgage qualification.

Lenders prefer funds used for a down payment to have been in the borrower’s bank account for a certain period, known as “seasoning.” Funds are seasoned if held for at least 60 to 90 days before the mortgage application. This timeframe allows lenders to verify the origin of funds and confirm they are not recently acquired debt.

If gifted funds have not been seasoned, lenders will require specific documentation. This documentation helps the lender understand the source of the money and confirms it is a true gift with no repayment obligation. A properly documented gift can assist in meeting down payment requirements and may lead to a more favorable loan-to-value ratio.

Documenting the Gift for Your Lender

When gifted funds are used for a home purchase, lenders require formal documentation, typically a “gift letter.” The primary purpose of this letter is to assure the mortgage lender that the money is a genuine gift with no expectation of repayment, distinguishing it from a loan that would impact the borrower’s financial standing.

A gift letter must include details to satisfy lender requirements. It should state the donor’s full name, address, phone number, and relationship to the borrower. The exact dollar amount of the gift and the date the funds were or will be transferred must also be specified. An explicit statement from the donor confirming the money is a gift with no repayment obligation is essential.

The letter should ideally include the address of the property being purchased, if known. Both the donor and the recipient are required to sign the gift letter. Many mortgage lenders provide their own templates, and it is advisable to use their specific form if available. Beyond the letter, lenders usually require proof of transfer, such as bank statements showing funds leaving the donor’s account and entering the recipient’s account.

Other Ways Parents Can Provide Financial Assistance

Beyond direct cash gifts, parents have alternative methods to provide financial assistance for a home purchase. These options offer flexibility depending on the family’s financial situation and long-term goals. Understanding the structure and implications of each method is important.

One alternative is a formal family loan. For this arrangement to be recognized as a loan and not a gift by the IRS, it must be structured with a written agreement. This agreement should specify repayment terms and include an interest rate at least equal to the IRS’s Applicable Federal Rates (AFR). The IRS publishes these rates monthly. Charging below the AFR could result in the foregone interest being treated as an imputed gift, subject to gift tax rules. A formal loan will increase the child’s debt-to-income ratio, which lenders consider during mortgage qualification. The parent, as the lender, would also be required to report any interest received as income.

Another option is for parents to co-sign the mortgage. Co-signing means parents share legal responsibility for the loan repayment. This can help a child qualify for a mortgage or secure more favorable terms, especially if the child has limited credit history or income. However, co-signing impacts the parents’ own credit profile and debt-to-income ratio, potentially affecting their ability to obtain future credit.

Parents might also consider shared ownership, where they co-purchase the home with their child. This arrangement involves joint ownership of the property, which can have implications for property taxes, future sale, and estate planning. Discussions with legal and financial professionals are often involved to determine the most suitable approach.