Borrowing money from family for a down payment is allowed under FHA and conventional mortgage rules, but only if the loan is set up as formal secondary financing: a written promissory note, a recorded lien on the home, full disclosure to your lender, and monthly payments that get counted against your qualifying ratios. A handshake IOU won’t pass underwriting. Because a family loan shrinks the mortgage you qualify for, many buyers and their relatives end up restructuring the money as a gift instead.
Gift or Loan: Why the Label Changes Everything
Every underwriter reviewing family money asks one question: does it have to be paid back? If no, it’s a gift, and most programs welcome it. If yes, it’s secondary financing, and the rules get much tighter.
The reason is simple. Your primary lender wants to be first in line if anything goes wrong. An undisclosed repayment obligation to a relative competes with your mortgage payment each month and can create a hidden lien. FHA, Fannie Mae, and Freddie Mac all require disclosure of where down payment funds come from, and underwriters flag any large deposit that doesn’t match your normal income pattern.
So the honest answer to “can I borrow from family” has two parts. You can, if you document the loan properly and your lender’s program allows it. You probably shouldn’t, if structuring the money as a gift is realistic, because a loan reduces your buying power.
When a Family Loan Is Actually Permitted
FHA Secondary Financing From a Family Member
FHA explicitly allows a second mortgage held by a family member, and those funds can cover your entire minimum required investment, which is 3.5% of the purchase price. The conditions are strict:
- The loan must be secured by a recorded lien on the property.
- It has to be disclosed at application.
- The monthly payment is added to your total housing expense when the lender runs your ratios.
- The first mortgage plus the family loan combined cannot exceed 100% of the home’s appraised value.
- No balloon payment can come due in the first 10 years.
- Payments must be level, fixed, and due monthly.
- No prepayment penalty is allowed.
- If your relative borrowed the money to lend to you, the source cannot be anyone involved in the sale (seller, builder, your agent, your loan officer).
One detail trips people up: you cannot be a co-borrower on whatever loan your family member took out to raise the funds. That creates a circular obligation underwriting will reject.
Conventional (Fannie Mae) Loans
Fannie Mae also allows subordinate financing from a relative, with the specifics published in its Selling Guide. The principle matches FHA’s: the loan must be secured, disclosed, and the payment counted in your debt-to-income ratio. Unsecured personal loans from family are effectively off the table under conventional guidelines because they create a liability without a recorded lien, which threatens the primary lender’s position.
What’s Not Allowed
A verbal agreement, a signed note with no recorded lien, or any arrangement where you promise to repay without telling the lender will fail underwriting if discovered, and misrepresenting the source of your down payment on a loan application is mortgage fraud. Investment properties don’t accept family money at all under Fannie Mae rules, whether as gift or loan.
Structuring the Loan the Right Way
If you and your relative agree on a loan, put it in a written promissory note. The note should state the loan amount, interest rate, monthly payment amount and due date, maturity date, late payment terms, and what happens in default. The lien securing the note has to be recorded with the county recorder’s office; recording fees vary by jurisdiction. Both of you should consider having an attorney draft or review the documents to make sure they comply with your state’s requirements.
The interest rate matters to the IRS as well as to your lender. Family loans must charge at least the Applicable Federal Rate (AFR) for the month the loan is made. As of early 2026, those rates are roughly 3.56% for short-term loans (up to three years), 3.86% for mid-term loans (three to nine years), and 4.70% for long-term loans over nine years.
Charge less than the AFR and the IRS treats the shortfall as a taxable gift from your relative to you, while also taxing your relative on interest they never actually received. Two carve-outs soften this in practice. Loans of $10,000 or less are generally exempt, as long as the money isn’t buying income-producing assets. For loans between $10,000 and $100,000, the imputed interest is capped at your net investment income for the year, and if that figure is $1,000 or less it’s treated as zero. Above $100,000, the full AFR applies with no cap.
How a Family Loan Cuts Your Mortgage Approval
This is where family loans quietly kill deals. A gift doesn’t touch your qualifying ratios. A loan adds a monthly payment that goes straight into your debt-to-income calculation, and that can shrink the mortgage you qualify for by tens of thousands of dollars.
Fannie Mae caps total DTI at 36% for manually underwritten loans, with room to stretch to 45% for borrowers who have strong credit and cash reserves. Files run through Desktop Underwriter, Fannie Mae’s automated system, can qualify at up to 50%.
A quick example. You earn $7,000 a month. Your car payment, student loans, and credit cards total $1,200. The proposed mortgage with taxes and insurance is $1,800. That’s a 42.8% DTI, which fits under the automated 50% ceiling. Now add a $200 monthly payment on a family loan. Your DTI climbs to 45.7%. Still under 50%, but if the lender is underwriting manually at the 45% cap, you no longer qualify. Your income didn’t change. Your home price didn’t change. The family loan did.
That math is why most loan officers steer families toward a gift when it’s realistic. The money reaches the closing table either way; only one version costs you borrowing power.
Why Most Families End Up Using a Gift
Every major loan program allows gift funds for a down payment. The differences come down to who can give and how much your own money has to contribute.
FHA
Your full 3.5% minimum down payment can come from a gift. FHA accepts gifts from a broad list of relatives (including cousins, aunts, uncles, nieces, and nephews), employers, unions, charitable organizations, close friends with a demonstrated interest in your life, and government homebuyer assistance programs. Anyone with a financial stake in the sale is excluded: the seller (unless they’re a relative giving a gift of equity), the builder, your loan officer, or your agent.
Conventional
Fannie Mae allows gift funds on a primary residence from any relative by blood, marriage, adoption, or legal guardianship, plus domestic partners, fiancés, former relatives, and people with a long-standing familial or mentorship relationship. For a one-unit primary residence, the entire down payment can come from a gift at any loan-to-value ratio. For a two-to-four-unit property or a second home with less than 20% down, you have to contribute at least 5% from your own funds before gift money covers the rest. Gifts aren’t permitted on investment properties.
VA
VA loans typically require no down payment, but gift funds can go toward closing costs and the VA funding fee. Family members are acceptable donors.
Documenting a Gift
If the money is a gift, the lender will require a signed gift letter stating the donor’s name, address, phone number, and relationship to you; the exact gift amount; an explicit statement that no repayment is expected or required; the property address; and signatures from both of you. Your loan officer usually provides a template.
The donor also needs to produce recent bank statements, generally covering the last 30 to 60 days, showing they had the funds and didn’t borrow them to make the gift. If the money has already moved, the underwriter will want to see both the withdrawal from the donor’s account and the matching deposit in yours.
Moving the Money
Whether the funds are a gift or a loan, the lender needs a clean paper trail. Wire transfers are the easiest to document because both banks generate immediate records. A cashier’s check drawn directly from the donor’s account also works. Cash, personal checks routed through a third party, or untraceable transfers don’t.
Keep the deposit receipt or transaction confirmation showing the amount and source, and send it to your loan officer along with the signed gift letter or recorded promissory note. Under FHA guidelines, any deposit larger than 2% of the sale price requires documentation showing where it came from and confirming it wasn’t borrowed to make the down payment.
Tax Side for the Giver
If the money ends up classified as a gift (either because it started that way or because a below-market loan gets recharacterized), the person giving it bears any gift tax consequences, not you. In 2026, an individual can give up to $19,000 per recipient per year without filing a gift tax return. A married couple can give $38,000 jointly to the same person.
If a parent gives you $30,000, they’ve exceeded the annual exclusion by $11,000. They file IRS Form 709 to report the gift, but almost certainly owe no actual tax; the excess reduces their lifetime estate and gift tax exemption, which sits above $13 million for 2026. Form 709 is due April 15 of the following year, and extending the income tax return extends the Form 709 deadline too.