Intrafamily Mortgages: Financing a First Home

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Parents can be the mortgage lender - often to everyone's benefit.

When a parent finances a child's home purchase, both sides can end up better off than they would be with a bank in the middle. It is also the family loan with the most moving parts, and the one where getting the structure right matters most.

The arithmetic

A mortgage-length loan uses the long-term Applicable Federal Rate, which applies to terms over nine years. Because the AFR tracks Treasury yields rather than retail mortgage pricing, it typically sits meaningfully below what a bank would offer for the same borrowing.

That spread is the whole opportunity, and it cuts both ways:

• The borrower pays less than a retail mortgage would cost, often with no origination fees, no mortgage insurance and no underwriting queue.
• The lender earns more than cash or short-dated Treasuries typically pay, secured against real property, from a borrower they know better than any underwriter could.

The margin a bank would have captured stays inside the family.

Secure it properly

This is the step families skip, and it is the one that matters most in an intrafamily mortgage.

For the loan to function as a mortgage rather than an unsecured personal loan, it should be secured by the property and recorded with the appropriate county office, as a mortgage or deed of trust depending on your state.

Recording does several things at once:

• It creates a real lien, so the lender is a secured creditor rather than one voice among many if things go wrong.
• It establishes priority against later claims on the property.
• It is generally a prerequisite for the borrower to treat the interest as qualified residence interest for deduction purposes. Unsecured debt does not qualify, however clearly it was intended to buy the house.
• It makes the arrangement unambiguously a loan, which protects it from being recharacterized as a gift.

Where these go wrong

Rate set too low. Below the long-term AFR, the shortfall is imputed: phantom interest income for the lender and a deemed gift to the borrower, every year the loan runs.

Never recorded. The family intended a mortgage and created an unsecured loan. The interest deduction is likely lost and the lender's position is far weaker.

Repayment that quietly stops. The most common failure. Nobody wants to raise it, so months pass, and what was a loan starts to look like a gift with a signature on it. Automated repayment removes the conversation entirely.

Silence about the siblings. A parent lending several hundred thousand to one child materially changes the estate. Unaddressed, it surfaces at exactly the wrong moment. A documented balance can be accounted for in the plan; an informal one becomes an argument.

Partial financing is often the better move

An intrafamily mortgage does not have to replace the bank. Frequently the highest-leverage version is a second position behind a conventional first: the family funds the gap that is actually blocking the purchase (the down payment shortfall) while the institution carries the bulk.

With the median first-time buyer now 40 years old and median first-time down payments at their highest since 1989, the down payment is usually the binding constraint. It is a lump-sum problem, which is exactly what a family balance sheet is well suited to solve and a monthly budget is not.

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General information, not tax or legal advice. Recording requirements, lien priority and interest deductibility vary by state and situation. Work with a real estate attorney and your tax adviser.