Gifting vs. Lending Money for a Home Down Payment: What’s the Difference?
Helping a loved one, such as an adult child, buy a home is one of the most common and emotionally charged financial decisions we can make.
For many parents, the question isn’t whether to help, but how: Should the money be a gift, or should it be structured as a loan?
While those options can feel interchangeable within a family, mortgage lenders, tax rules, and long-term planning realities treat them differently. Understanding those differences upfront can help families avoid surprises, reduce stress during the homebuying process, and make decisions that fit into the bigger picture.
The Big Distinction: Expectation of Repayment
At its core, the difference between gifting and lending comes down to one thing: Is repayment expected?
A gift is money given with no expectation of repayment.
A loan is money that will be paid back, even if the terms are informal or flexible.
That distinction matters because lenders must evaluate a buyer’s true financial obligations. If repayment is expected, the lender views it as debt. If not, the funds may be treated as the buyer’s own money, provided the documentation supports that.
How Gifts Typically Work
For many families, gifting funds is the simplest path from a mortgage perspective.
Most loan programs allow gift funds for down payments and closing costs, especially when the buyer is purchasing a primary residence. Lenders usually require:
A gift letter stating the amount and relationship and that repayment is not required
A clear paper trail showing where the money came from and how it was transferred
From a tax standpoint, gifts may require reporting by the giver if they exceed annual limits, but that doesn’t necessarily mean taxes are owed. This is often an area where families benefit from coordinating with their CPA and financial advisor so nothing gets missed.
The upside of gifting is the simplicity it offers during underwriting. The trade-off is that the parents are giving up any legal claim to repayment, which may or may not feel comfortable depending on family dynamics and long-term goals.
How Loans Are Different
Loans introduce more complexity, but sometimes they’re the right choice.
If parents expect to be repaid, the funds should be treated as a loan from the start. That means:
Putting repayment terms in writing
Disclosing the loan to the mortgage lender early
Understanding how the loan payment affects the buyer’s debt-to-income ratio
Some loan programs restrict or disallow certain borrowed funds as a source of down payment, which can derail a purchase if discovered late in the process. Informal “we’ll figure it out later” arrangements often create the most friction, both with lenders and within families.
From a tax perspective, family loans can also raise questions around interest rates and reporting, particularly if the loan is made at a very low or zero rate.
California Considerations
Families in California should be aware of a few additional nuances:
Gifts received are generally not treated as taxable income at the state level.
If a family loan charges interest, California usury rules may apply, limiting the interest rate, depending on how the loan is structured.
In some cases, families choose to secure a loan with real estate using a promissory note and deed of trust, which adds legal and administrative steps but can provide clarity and protection.
California is also home to various down payment assistance programs that function as loans rather than gifts, which can add another layer to the decision-making process.
Where Real Estate Decisions and Planning Intersect
Helping an adult child with a down payment doesn’t happen in a vacuum. Often, the money comes from a larger real estate decision on the parents’ side: selling an investment property, downsizing, or selling an inherited home.
This is where coordination matters.
When real estate transactions are viewed alongside cash flow, taxes, and long-term goals, families may be better positioned to make choices that fit together rather than pulling in different directions.
At Evermont Wealth, our financial planning clients can take advantage of our in-house real estate support. This structure allows families to connect the dots between the sale of a property, the tax implications, and how proceeds may be used, whether that’s funding the next phase of life or supporting a child’s home purchase.
How to Decide: Gift or Loan?
There’s no one-size-fits-all answer. In general:
Gifting may make sense when parents are comfortable parting with the funds and want a cleaner mortgage process for their child.
Lending may be appropriate when repayment expectations are real or when fairness among multiple children is a priority.
What matters most is choosing an approach that’s documented properly, disclosed early, and aligned with the family’s broader financial picture.
A Next Step If This Sounds Familiar
If your family is navigating a home purchase, a property sale, or a decision about gifting or lending funds, this is a good time to step back and look at how the pieces fit together.
If you or someone you care about is facing this situation, reach out to learn more about how we help our financial planning clients coordinate the details and support informed decisions.
If you’re already a client, simply reach out to your advisor to get the process started. If you’re not a client, you can schedule a complimentary call with one of our advisors here.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.