Many first-time home buyers need help buying a home. If they’re lucky, family members can lend a hand. 

Younger home buyers face a mountain of obstacles, including rising home prices and interest rates, too few homes for sale and student loans. Student debt is a major source of trouble. When the National Association of Realtors surveyed recent home buyers who had problems saving up a down payment, 53% of those in the youngest group (37 and younger) reported student loan debt was their biggest hurdle.

Families appear to be pitching in to help. Almost a quarter of homebuyers ages 22 to 30 reported that cash gifts from family and friends were the source of their down payments, with another 5% saying they had received loans from relatives or friends. Family assistance like this works best when the kids qualify for a mortgage on their own and parents make the purchase more affordable with, for example, a bigger down payment or a lower interest rate. Here are three ways parents can help.

1. Give money

A gift of money is often best. Parents can write a check for any amount they choose. That’s it — no contract or ongoing commitments. Or they can pay all or part of an expense such as closing costs or an interest rate buydown. Providing down payment assistance can help new borrowers avoid paying for private mortgage insurance, which helps keep their monthly payment low.

How it works

The annual gift tax exclusion for 2023 will be increasing to $17,000 – an increase from $16,000 in 2022. If you stay under the annual exclusion, then there is no need to file a gift tax return. For example, you and your spouse can give your child and your child’s spouse a total of $68,000 ($17,000 × 2 parents × 2 recipients). However, if any one gift is given that exceeds the annual tax exclusion amount, then the gift giver will need to file IRS Form 709.

Lenders like to see money gifts — easily traceable checks, bank transfers or wire transfers — in a borrower’s bank account three or four months before applying for a mortgage. Givers and recipients may need to sign letters confirming that the money isn’t a loan. 

2. Provide a loan

Parents with cash to invest can become a lender, offering extra-easy terms, like no closing costs or no down payment. Parents can charge a higher rate of interest on their money than it earns in a savings or money market account and still offer a lower-than-market mortgage rate, making this a win-win. 

How it works

Credit between family members requires the formalities of a bank loan, so you’ll need to draw up a contract with the repayment terms. Plus family lenders must charge at least the Applicable Federal Rate, the minimum interest rate required to keep the assistance from being considered a gift. 

3. Co-borrow

Although riskier for parents, co-borrowing is another option. Co-borrowing helps borrowers overcome a limited credit history or a too-high debt-to-income ratio.

How it works

Parents apply for the mortgage, too. They must meet the lender’s credit requirements and sign loan papers with their kids at closing. Aside from the mortgage itself, a separate family contract can define expectations and details such as who gets how much equity when the home sells and what happens in case problems arise.

For parents interested in being co-borrowers, there are some things to keep in mind:

• Not all loans allow co-borrowers, so it’s good to confirm the option when shopping for mortgages

• Some lenders may call this step co-signing, which may have different parameters, but the outcome is the same: Parents and children are equally responsible for the loan and any missed mortgage payments

• Parents’ credit could be affected, making it hard to finance another big purchase later, even if children make payments on time.

With all the headwinds facing first-time home buyers, family help sometimes makes all the difference.