Apr 28, 2026
At 65, Dianne wants to buy her parents' home. Her mother passed away and her father is now the sole owner. She also plans to move in with him within the next couple of years.
Because she has siblings, inheriting the home after her dad passes isn't an option. So if Dianne wants the home, she'll need to buy it outright.
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She has the income and an excellent credit score to qualify for a traditional mortgage, but would prefer to cut out the middleman and borrow directly from her father. Under this arrangement, Dianne would make monthly payments just like a regular mortgage, only the money would go to her dad and the interest rate would be lower than a bank would charge.
It's a hypothetical scenario, but not an unusual one, especially in today's housing market, where elevated mortgage rates and high home prices are forcing families to get creative with their financing. According to The National Association of Realtors, these types of transactions are on the rise, with 17% of buyers between July 2023 and June 2024 using intra-family financing (1).
Why family loans can be appealing
The biggest draw is paying less interest, which lowers the lifetime cost of the loan.
For a family loan to be considered legitimate, it must follow minimum interest rates set by the IRS, known as the Applicable Federal Rate (AFR). As of April 2026, AFRs are about 3.6% for short-term loans, 3.8% for mid-term loans and 4.6% for long-term loans (2).
That's considerably lower than typical mortgage rates. According to Freddie Mac, as of April 23, 2026, the average 30-year fixed rate was 6.23%, while the 15-year averaged 5.58% (3). That kind of difference can translate into considerable savings over the life of a loan.
There's also flexibility. Families can customize repayment terms in ways banks typically won't allow, adjusting timelines, payment frequency and potentially even building in contingency plans if financial hardship arises.
Money stays within the family, too. Instead of paying interest to a lender, Dianne would be paying her father.
That doesn't mean such options are without flaws.
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The risks
One of the biggest misconceptions is that family loans are informal.
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To be considered legitimate and avoid potential issues and disputes, they need to mirror a traditional mortgage. That typically means including:
- A formal loan agreement drafted by an attorney.
- An interest rate at or above the AFR.
- A clear repayment schedule.
- Proper documentation of payments.
If those elements aren't in place, the IRS may treat the arrangement as a gift. That can trigger gift tax reporting and count toward the parent's lifetime estate and gift tax exemption (4).
Selling the home below market value can lead to the same outcome. If that happens, the difference between the sale price and the actual value can be treated as a gift (5), so an independent appraisal, which can cost anywhere from $300 to $1,000, is important (6).
There are other tax considerations, too. Any interest Dianne's father receives must be reported as income. And if Dianne wants to deduct the interest on her taxes, the loan must be properly secured against the property and documented under IRS rules (7).
These aren't the only potential headaches.
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While a home isn't highly liquid, turning it into a private loan can further limit access to that wealth. Instead of selling or tapping equity, Dianne's father would have to rely on monthly repayments, which may not be enough if large expenses arise. It could also affect Medicaid eligibility, which has strict asset limits and a five-year lookback period (8).
Family dynamics add another layer.
Because the home acts as collateral, missed payments could technically put the father in an uncomfortable position of having to foreclose on his own child.
Siblings, meanwhile, may question fairness, particularly if the home is sold at a discount or if the transaction impacts their own inheritance. And if the father dies before the loan is repaid, the remaining balance becomes part of the estate unless clearly addressed in the agreement.
The bottom line
For Dianne, a family loan could offer lower borrowing costs, more flexible terms and a way to keep the home in the family. But it's not without complications.
Before moving forward, she and her father should work with a real estate attorney and tax professional to structure the loan properly, ensure it complies with IRS rules and clearly document how it will be handled over time — including in the event of death or financial hardship.
They should also compare traditional mortgage options to ensure the savings justify the added complexity and risks.
Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
National Association of Realtors (1); Internal Revenue Service (2),(5),(7); Freddie Mac (3); Charles Schwab (4); Rocket Mortgage (6); Medicaid.gov (8)
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Daniel Liberto is a financial journalist with over 10 years of experience covering markets, investing, and the economy. He writes for global publications and specializes in making complex financial topics clear and accessible to all readers.
