Guide
Lending family money for a house: gift, loan, or family mortgage?
For parents, grandparents, and relatives helping someone buy a home. Last reviewed October 2, 2026.
The short answer: if you don’t need the money back, gift it. If you do, skip the informal IOU and set up a recorded family mortgage: a written note at or above the IRS minimum rate, secured by a mortgage or deed of trust recorded with the county, with payments tracked and a matching interest statement for both of you each year. It protects the lender, lets the borrower deduct the interest, and keeps the rest of the family in the loop.
Three ways to help, compared
Compare
Gift
Informal loan (IOU)
Recorded family mortgage
Paperwork
Gift tax return only if over $19,000 per recipient (2026)
Maybe a signed note
Note, recorded mortgage or deed of trust, payment records
Repayment
None
Expected, hard to enforce
Expected and enforceable
Lender protected if the home is sold or refinanced?
Not applicable
No
Yes. The lien must be paid off.
Borrower can deduct interest?
No
No (not secured)
Yes, if they itemize
IRS minimum rate applies?
No
Yes
Yes
Fair to other heirs?
Can be handled in your estate plan
Often disputed later
Clear balance at any time
Why the informal IOU causes the most trouble
The handshake loan is the most common choice and the one that most often goes wrong. Without a recorded lien, the lender has no claim on the house if it’s sold, refinanced, or caught up in a divorce or a creditor’s claim. Without a written schedule, nobody agrees on what’s been paid. Without the right rate, the IRS can treat part of the arrangement as income to the lender and a gift to the borrower. And because the loan isn’t secured, the borrower can’t deduct the interest.
Seven steps to a family mortgage done right
- Agree on the terms in writing: the amount, the term, the payment, what happens if a payment is late, and what happens if the home is sold.
- Set the rate at or above the IRS AFR for the loan’s term, in the month the loan is made. See this month’s AFR rates.
- Sign a promissory note. A real estate attorney in the property’s state should prepare it.
- Secure it with a mortgage or deed of trust, and record it with the county. Recording is what protects the lender and makes the interest deductible.
- Set up the payment schedule and method. Automatic bank transfers create a clean record.
- Keep a shared ledger that both of you can see, updated whenever a payment is made, missed, or doubled up.
- Exchange matching year-end interest statements so the borrower’s deduction and the lender’s income agree. See who sends the 1098.
What it costs
Approach
Typical cost
What you get
Do it yourself
Free to about $100 for templates, plus the county recording fee
Documents you prepared yourself; no tracking or statements
Real estate attorney
Varies by state, often several hundred to a couple thousand dollars
Properly drafted and recorded note and mortgage
Full-service family mortgage company
For example, National Family Mortgage lists setup from $1,175, plus a $65 servicing setup fee and servicing from $20/month if you add it (as of October 2026)
Documents, recording, and optional servicing
PaperItUp, alongside your attorney
$249 setup, then $19/month
Rate check, payment schedule, recording checklist, reminders, shared ledger, and matching year-end statements
PaperItUp isn’t a law firm and doesn’t prepare legal documents. We keep a properly documented loan on track after closing, and we never hold your money: payments go directly to the lender.
Two cautions before you lend
- If a bank mortgage is involved too, tell the bank. Most lenders count a family loan as debt when they qualify the borrower. Signing a gift letter for money that is really a loan can be mortgage fraud.
- Selling your own property on terms is regulated differently. If you’re the seller carrying the note, rather than lending cash, federal and state rules may limit how many seller-financed sales you can do and what you must disclose. Talk to a real estate attorney in the property’s state.
See where your family loan stands
Our free check takes about a minute and shows what’s missing: the rate, the recording, the payment records, or the year-end statement.
Common questions
What is the best way to lend money to family for a house?
If you expect to be repaid, a recorded family mortgage is usually the cleanest option: a promissory note at or above the IRS AFR, secured by a recorded mortgage or deed of trust, with payments tracked and matching year-end interest statements. It protects the lender and lets the borrower deduct the interest.
Should I just gift the money instead?
If you don’t need it back, a gift is simpler. In 2026 you can give $19,000 per recipient without filing a gift tax return, and larger gifts usually just use part of your lifetime exemption. A gift can’t be “called” later, though, and it doesn’t create a deduction for the recipient.
Can a family loan be used for a down payment with a bank mortgage?
Sometimes, but you must disclose it. Most lenders count a family loan as debt in qualifying. Describing a loan as a gift on a gift letter when it’s really a loan can be mortgage fraud.
How much does it cost to set up a family mortgage?
Costs range from close to nothing for a do-it-yourself note to a few thousand dollars with a full-service company. Most families need an attorney to prepare and record the note and mortgage, plus a way to track payments and produce year-end statements.
Last reviewed October 2, 2026. This guide is general information, not tax or legal advice. Rules depend on your facts and your state; check with a tax professional and a real estate attorney before you act. Questions: help@paperitup.com