Gift Letter vs Promissory Note: Documenting a Home Down Payment From Family

Your daughter found the house. She has the income and the credit, but she is a little short on the down payment, and you want to help. So you offer to wire her the money. Here is what actually happens next: her loan officer asks a single question that changes everything, and that question is whether the money is a gift letter gift or a loan. The answer determines which document you sign, and it can quietly reshape whether she qualifies at all.

The distinction sounds like a formality. It is not. A gift and a loan are treated as opposite things by a mortgage underwriter, and choosing the wrong one can sink an approval or create a tax headache you did not see coming. The good news is that both paths are perfectly legitimate. You simply have to decide which one you are on and then document it the way the rules expect.

Why the lender cares so much

Mortgage lenders need to know that the borrower can actually carry the loan. If your money is a gift, it becomes part of the borrower's own funds, and there is nothing to repay. If your money is a loan, it is a new monthly obligation that raises the borrower's debt-to-income ratio, which is one of the main numbers an underwriter uses to decide how much house someone can afford.

According to Fannie Mae guidelines, gift funds for a down payment must be documented with a signed letter from the donor. The letter certifies that the money is a true gift with no expectation of repayment, and the lender will separately ask for proof of the transfer, such as a bank statement showing the money leaving your account and arriving in your child's. The Consumer Financial Protection Bureau (CFPB) describes the same idea in plainer terms: the letter exists so the lender can trace the funds and confirm they are not a hidden loan.

There is a reason lenders are so particular here. A large deposit that appears in a borrower's account a few weeks before closing raises an obvious question, which is where the money came from and whether it has to be paid back. A gift letter answers that question in a way the underwriter can rely on. Without it, the lender may simply refuse to count the funds, and the whole purchase can stall while everyone scrambles to explain a deposit that should have been documented from the start.

What a gift letter actually says

A mortgage gift letter is short and specific. It names the donor and the recipient, states the relationship between you, gives the exact dollar amount, identifies the property being purchased, and includes a clear line that no repayment is expected or required. You sign it, and often you provide contact information so the lender can verify the letter if needed.

That last line is the heart of it. If there is any repayment expectation, even an informal understanding at the kitchen table, the money is not truly a gift, and signing a letter that says otherwise misrepresents the transaction to the lender. That is a line you do not want to cross.

When it is really a loan, use a promissory note

Suppose you and your child both agree the money should come back to you over time. That is a loan, and a loan deserves a real document. A promissory note records the amount, the interest rate if any, the repayment schedule, and what happens if a payment is missed. For a down-payment loan you would typically use an installment note, since the money is repaid in regular scheduled payments rather than all at once.

Be honest with the loan officer here. If the down-payment money is a loan, the underwriter needs to count that payment in the borrower's monthly obligations. Some loan programs limit or disallow borrowed down-payment funds entirely, so the borrower should confirm what the program allows before anyone signs anything. Hiding a loan as a gift is not a clever workaround. It is a misstatement on a mortgage application.

The gift-tax angle, in plain terms

Many parents freeze at the phrase gift tax, picturing a bill for helping their own child. In practice that fear is usually misplaced. The Internal Revenue Service (IRS) allows an annual exclusion, meaning you can give any one person up to a set amount each year without needing to file a gift tax return at all. That exclusion amount adjusts periodically for inflation, so check the current-year figure on irs.gov before you assume.

Even if a gift exceeds the annual exclusion, that does not mean tax is due. The extra amount typically counts against a large lifetime exemption, and you simply file a gift tax return to report it. Most families never come close to owing anything. A married couple can also each give separately, which effectively doubles what two parents can hand to one child in a year. When the numbers get large, a short conversation with a tax professional is money well spent.

One quiet advantage of the gift route is that a true gift creates no future obligation to track. There is no schedule to police, no interest to calculate, and no awkward reminder text when a payment slips. For a parent who genuinely intends to give rather than lend, that simplicity is part of the appeal, and the gift letter is the small piece of paper that makes the whole thing official in the eyes of the lender.

So which document do you need

Decide the real nature of the money first, then paper it correctly. If you never expect the money back, it is a gift, and your child's lender will want a signed gift letter along with proof of the transfer. If you do expect repayment, it is a loan, and a written promissory note protects both of you and keeps the mortgage application honest. The worst outcome is the fuzzy middle, where nobody wrote anything down and a warm gesture turns into a family argument three years later. Pick a lane, put it in writing, and you have protected the relationship along with the money.

Sources

• Fannie Mae Selling Guide B3-4.3-04, Personal Gifts
• IRS, Frequently Asked Questions on Gift Taxes
• CFPB, mortgage down payment resources