Gift or Loan: Helping a Child With a Down Payment

The offer is accepted, the closing date is on the calendar, and the gap between what the lender wants at closing and what is in your child's account is sitting on the kitchen table. The instinct, for a lot of parents who can write the check, is to write it and sort out the rest later: a family loan in spirit, a gift if things stay tight, a "we'll figure it out" that feels generous and flexible. Mortgage underwriters and the IRS both already have a category for this money. Neither of them has a category called "we'll see." Understanding that classification, gift or loan, chosen on purpose, is the whole point of this article.

The Lender Has Already Chosen a Bucket

To a mortgage lender, money that arrives from a parent is either a gift or a debt. A gift, documented with a gift letter that says repayment is not expected, can count toward the down payment without adding a monthly obligation. A loan, even from a parent, is a debt payment that gets folded into the child's debt-to-income ratio, the same way a car loan would. If repayment is expected, even informally, and the application treats the money as a gift, that is not a paperwork shortcut. It is a misstatement of the child's ability to repay, and lenders are required to underwrite on the actual obligation.

The practical consequence is that "we'll help now and you can pay us back when you can" often does the child no favor. It can push a borderline approval over the line the wrong way, or it can close the loan on terms that were never true. The cleaner move is to decide, before the gift letter is signed, whether this money is leaving for good.

The IRS Has a Floor, Not a Favor

Even a loan that is real between parent and child is not automatically real to the IRS. Below-market family loans are governed by a specific rule: if the interest charged is below a published monthly floor, the IRS can treat the missing interest as a gift from the parent to the child and as interest income to the parent, including interest the parent never actually received. That floor is the applicable federal rate, published each month in an IRS revenue ruling. For a loan of more than three years and up to nine, the August 2026 annual rate was 4.35 percent.

Charging less than the floor does not make the help cheaper. It can make the parent taxable on income that never showed up in a bank account.

A bona fide intrafamily loan (a promissory note, a rate at or above that floor, and payments that actually happen) is the version the tax rules recognize. A demand that "they know they owe us" is the version that can be recharacterized as a gift after the fact, which is rarely the gift anyone meant to make. The rate also locks in for a fixed-term loan in the month the note is signed, so the timing of the paperwork is part of the decision, not an afterthought.

So Is It Worth It for You?

The self-check is one question: can you write this check and never need the money back for your own retirement, healthcare, or housing? If the honest answer is yes, this can be a gift. Sign the lender's gift letter because it is true, not because it is convenient. If the honest answer is no, it has to be a loan the child's mortgage lender will count as debt, with a real repayment schedule, or it should not happen at this size.

The messy middle, "we might need it back if the market turns, or if one of us gets sick, but we do not want to hurt the mortgage," is the handshake. It fails the gift test because repayment is contemplated, and it fails the loan test because nothing is documented. That is the version that can unwind a closing, create a surprise on a tax return, and still leave the parents short of money they later need.

The escape hatch is to pick one of the two real options by name. A true gift, with a gift letter the lender will accept. Or a bona fide intrafamily loan: a written note, interest at least at the applicable federal rate for the month it is signed, and payments that actually occur, disclosed to the mortgage lender so the debt is underwritten in the open. There is a third path that sometimes fits better than either: helping in a smaller amount that you can truly gift, and letting the child cover the rest from savings, a longer timeline, or a less expensive house. That is not a lesser version of help. It is help that does not borrow against the parents' later years.

The sharper question to bring to an advisor is not "can we help with the down payment," but "if we never see this money again, does our own plan still work, and if it doesn't, are we prepared to put a real loan on the child's mortgage application?"

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