Some people borrow money from their parents or other relatives to purchase a house. If a relative has enough money on hand to be able to finance a home purchase, this can be a very “friendly” alternative to a traditional mortgage. In addition, for some people without a sufficient down payment or credit history, it might be one of the few ways to arrange buying a home.
If you borrow money from relatives and you plan to pay them back in regular installments over time, it can be a good idea to “formalize” the loan and legally record the mortgage. Why? If you do, then you can deduct your mortgage interest on your income taxes.
The IRS won’t let you deduct the interest you pay on an “informal” loan, but if you observe the legal rules and make sure the loan is properly recorded as a mortgage, then you can potentially save thousands of dollars in taxes…even if you’re borrowing from your family.