How to Help Your Child Buy a House: Gifts, Loans, and Co-Signing

If you want to help your child buy a house, you have five practical options: gift them cash for the down payment, co-sign or co-borrow on the mortgage, lend them the money yourself, sell them a home you already own at a discount, or in narrow circumstances buy the home in your own name. Each path carries its own documentation, tax filing, and credit consequences, and the choice matters more than most families realize. One number frames all of them: the 2026 annual gift tax exclusion is $19,000 per recipient, and any help above that line triggers a federal filing even when no tax is owed.¹

Gifting Cash for the Down Payment

Handing your child money is the simplest path, but lenders scrutinize gift funds carefully. Every conventional mortgage backed by Fannie Mae or Freddie Mac requires a formal gift letter before closing. That letter must include your full name, your relationship to the buyer, your address, the exact dollar amount, and a clear statement that the money is a gift with no repayment expected. Leave out that last sentence and the underwriter will treat the funds as a second loan, which inflates your child’s debt-to-income ratio and can sink the application.

The lender also needs a paper trail. Expect to provide at least two months of bank statements showing the funds sat in your account before the transfer, plus wire receipts or copies of canceled checks documenting the movement. A sudden large deposit in your account, money bouncing between accounts, or missing records can delay or deny the loan.

Can the Gift Cover the Entire Down Payment

For a single-family primary residence, Fannie Mae does not require any minimum contribution from the borrower’s own funds, regardless of the loan-to-value ratio. Your child can fund the entire down payment and closing costs with your gift. The rule tightens for two- to four-unit properties: if your child is putting less than 20 percent down, they must contribute at least 5 percent from their own funds before gift money can cover the rest.² FHA loans follow a similar pattern, and the full 3.5 percent minimum down payment can come from a family member’s gift with the same letter and paper trail.

The Gift Tax Filing You Probably Owe

If you give your child more than $19,000 in a single calendar year, you must file IRS Form 709 by April 15 of the following year.³ Filing the form does not necessarily mean you owe tax. The federal lifetime gift and estate tax exemption for 2026 is $15,000,000 per person, following the increase enacted by the One, Big, Beautiful Bill Act signed into law in July 2025.¹ Any amount above the $19,000 annual exclusion simply reduces your lifetime exemption rather than generating an immediate bill. For most families, no gift tax will ever come due. The Form 709 filing is still mandatory.

If you’re married, you and your spouse can elect to split gifts, which effectively doubles the annual exclusion to $38,000 per recipient. Both spouses must file their own Form 709 to make the election, and the consenting spouse must sign a Notice of Consent on the return.³ The election applies even when only one spouse actually wrote the check. On a $50,000 down payment gift from married parents, splitting means just $12,000 exceeds the combined exclusion.

Co-Signing or Co-Borrowing on the Mortgage

When a gift isn’t feasible, some parents add their name to the mortgage. There are two distinct roles, and confusing them catches families off guard.

A non-occupant co-borrower shares full legal responsibility for the loan and typically appears on the property title. Your income and credit help your child qualify, but the debt also counts against your future borrowing capacity.
A co-signer, or guarantor, guarantees the debt without taking an ownership stake. You’re on the hook for payments if your child defaults, but you have no claim to the property.

Both roles require extensive financial documentation. The lender will pull your credit report, require IRS Form 4506-C to obtain your tax transcripts, and ask for your most recent W-2s and at least 30 days of consecutive pay stubs.⁴⁵ The underwriter then calculates a combined debt-to-income ratio that includes your car payments, student loans, credit cards, and any other mortgages you carry. For loans run through Fannie Mae’s automated system, the maximum allowable DTI is 50 percent; manually underwritten loans cap at 36 percent, or up to 45 percent when the borrower meets higher credit score and reserve requirements.⁶

The Credit Risk Most Parents Overlook

The loan appears on your credit report as your obligation, whether or not you ever make a payment. If your child pays late, that delinquency hits your credit history too. The Federal Trade Commission is blunt on the point: the main borrower’s actions can damage your credit score, your credit report, and your history of on-time payments.⁷ The reported monthly obligation can also disqualify you from refinancing your own home or taking out other credit.

Getting Off the Loan Later

Removing a co-signer almost always requires refinancing. Your child takes out a new loan in their name alone and uses it to pay off the original mortgage. Some loans include a liability release clause that lets a co-signer petition for removal, but these clauses are uncommon and the lender retains discretion to deny the request. Before signing, have a realistic conversation about when your child’s income and credit will support a solo refinance, and treat that timeline as a concrete goal.

Lending the Money Yourself

Some parents prefer to be the bank, lending the purchase price directly and collecting monthly payments with interest. Done correctly, it can save your child thousands in lender fees while earning you a return. Done incorrectly, the IRS treats the arrangement as a taxable gift and your child loses the mortgage interest deduction. The difference comes down to interest rates and paperwork.

Setting the Interest Rate

The rate on a family loan must meet or exceed the Applicable Federal Rate published monthly by the IRS under Internal Revenue Code Section 1274(d). These rates vary by loan term. In February 2026, for example, the AFRs for annual compounding were 3.56 percent for short-term loans of up to three years, 3.86 percent for mid-term loans of three to nine years, and 4.70 percent for long-term loans over nine years.⁸ Charge less than the AFR and imputed interest rules under IRC Section 7872 kick in: the IRS treats the difference between what you charged and what you should have charged as a gift from you to your child and as phantom interest income to you.⁹

Two exceptions soften the rules for smaller loans. If the total outstanding balance between you and your child stays at or below $10,000, the imputed interest rules don’t apply at all, unless the loan is used to buy income-producing property. For loans up to $100,000, imputed interest is capped at your child’s net investment income for the year, and if that investment income is under $1,000, it’s treated as zero.⁹

The Documentation That Makes It a Real Loan

Draft a written promissory note that spells out the repayment schedule, interest rate, loan term, and consequences of default. A late fee provision, commonly 4 to 5 percent of the monthly payment, reinforces that this is a genuine lending arrangement. Then have a deed of trust or mortgage document drafted and recorded with the county clerk’s office. Recording creates a public record that protects your investment if the property is sold or if your child faces creditor claims.

Recording also unlocks a significant tax benefit for your child. The IRS only allows a mortgage interest deduction when the debt is secured by an instrument that is recorded or otherwise perfected under state law.¹⁰ Skip the recording step and your child’s interest payments become non-deductible, even when the loan is otherwise structured perfectly. On your side, you must report all interest received and keep detailed payment records.

Selling Your Home to Your Child at a Discount

If you already own the property your child wants, you can sell it to them below market and let the difference count as their down payment. Fannie Mae calls this a gift of equity, and it’s permitted on primary residence and second home purchases. The equity gift can fund all or part of the down payment and closing costs, though it cannot count toward financial reserves.¹¹

The transaction requires a signed gift letter and a settlement statement that reflects the equity gift. Because you’re both seller and donor, the lender might flag the arrangement, but Fannie Mae specifically states that an acceptable gift-of-equity donor is not considered an interested party subject to the usual limits on seller contributions.¹¹ The portion of equity you gift above the $19,000 annual exclusion counts against your lifetime exemption and requires a Form 709 filing, just like a cash gift.

Buying the Home Yourself With the Family Opportunity Mortgage

Fannie Mae’s occupancy guidelines include a narrow exception that lets a parent buy a home and have it treated as a primary residence, with the lower interest rates and down payment requirements that come with that classification, even though the parent won’t live there. The exception applies when your child is unable to work or lacks sufficient income to qualify for a mortgage on their own, typically due to a disability.¹² You’ll need supporting documentation, such as a Social Security disability award letter or medical certification.

Some lenders market the program as also covering college-aged children, but the Fannie Mae selling guide focuses on children who cannot qualify due to disability or insufficient income. If your child is a full-time student with no income, the insufficient income language could apply, but confirm with your lender before assuming eligibility. During underwriting, you must show enough income to cover both your existing housing costs and the new mortgage. The property is classified as owner-occupied under your name, so the tax and insurance obligations of ownership are yours even though your child is living there.

The Basis Trap: Lifetime Gift vs. Inheritance

Families with substantial home equity frequently make an expensive mistake here. When you gift a home or sell it to your child at a discount, your child inherits your original cost basis, which is the price you paid, adjusted for improvements and depreciation.¹³ If you bought the house for $150,000 and it’s now worth $500,000, your child’s basis is $150,000. When they eventually sell, they could owe capital gains tax on up to $350,000 of appreciation.

Property received through inheritance instead gets a stepped-up basis equal to fair market value at the date of death. The same $500,000 house passed through your estate would give your child a $500,000 basis and zero built-in gain. This isn’t a reason to avoid helping your child buy a home, but for families with highly appreciated property, run the numbers with a tax professional before choosing between a lifetime gift and other strategies. The size of the potential capital gains bill can dwarf the savings from any of the approaches above.

1
Internal Revenue Service. Estate and Gift Tax Updates
2
Fannie Mae. Personal Gifts
3
Internal Revenue Service. Instructions for Form 709 (2025)
4
Internal Revenue Service. Form 4506-C IVES Request for Transcript of Tax Return
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Fannie Mae. Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C
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Fannie Mae. Debt-to-Income Ratios
7
Federal Trade Commission. Cosigning a Loan FAQs
8
Internal Revenue Service. Rev. Rul. 2026-3
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Office of the Law Revision Counsel. 26 USC 7872 Treatment of Loans With Below-Market Interest Rates
10
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
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Fannie Mae. Gifts of Equity
12
Fannie Mae. Occupancy Types
13
Internal Revenue Service. Property (Basis, Sale of Home, etc.)