Paying off a mortgage is one of the biggest financial goals for homeowners. Making those monthly payments for 15, 30 years or longer can feel like a lifetime commitment. Fortunately, there are options to pay off your mortgage faster or receive help paying it off. One potential option is receiving help from family members who want to gift home equity.
If you’ve ever considered helping your parents pay off their mortgage you likely have questions. Can I legally pay my parents’ mortgage? What are the tax implications? How do I actually make the payments? This guide will explain everything you need to know if you want to pay off your parents’ mortgage.
Is It Legal to Pay Someone Else’s Mortgage?
Yes, it is perfectly legal to pay off all or part of someone else’s mortgage in the United States. The specifics depend on how you structure the gift.
You have a few options to pay off a mortgage
- Make regular monthly payments
- Make a one-time lump sum payment
- Assume the mortgage
- Pay off the mortgage and take ownership
As long as you properly report the gift to the IRS and follow gift tax rules, you can pay as much of the mortgage as you want. There is no legal issue with paying your parents’ mortgage directly or anonymously through the lender.
Tax Rules for Gifting a Mortgage Payoff
The tax rules you need to follow change if you give money to pay off a mortgage. Here are some key gift tax guidelines:
- You can give up to $17,000 per year per recipient without reporting it to the IRS. A married couple can gift $34,000.
- Lifetime gifts above $12.92 million are subject to gift tax in 2023. This threshold often changes year to year.
- Gift amounts between $17,000 and $12.92 million require filing a gift tax return but no tax is due.
- Interest paid towards a home can still be deducted by the recipient.
Talk to a tax expert to get a full picture of what this means for you. But unless you give more than $12, most of the time, paying off a mortgage won’t make you owe gift tax. 92 million in your lifetime.
How to Make Mortgage Payments on Your Parents’ Home
If you want to pay down your parents’ mortgage, you have a couple approaches.
Make Regular Monthly Payments
Gifting a monthly mortgage payment is the easiest option. Here’s how it works:
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Ask your parents for a copy of their mortgage statement. This shows the lender name, monthly payment, account number and payoff address.
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Make payments directly to the lender each month by check, wire transfer, online, etc.
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Put the money you give them into a separate account that will only be used for mortgage payments.
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Your parents can then pay the lender from that account so it appears as a normal payment.
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Be sure to track payments for tax purposes in case you exceed annual gift limits.
Making monthly payments gives your parents time to adjust to owning the home free and clear. You also avoid gift tax issues unless gifting over several years.
Make a Lump Sum Mortgage Payoff
For a faster payoff, you can make a single lump sum payment to wipe out the mortgage. Follow these steps:
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Contact your parents’ lender to request a payoff quote including the total payoff amount, account number and payoff address. This amount may differ from the current balance.
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Make the payment via wire transfer, cashier’s check, money order or other guaranteed funds. Include the account number and borrower names.
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Check with your parents to see when they will get the payoff notice from the lender. If you don’t pay your property taxes or homeowners insurance, it could lead to problems.
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Review gift tax reporting if the gift exceeds $17,000. You may need to file Form 709.
The lump sum approach lets you fully pay the mortgage immediately. But make sure your parents understand the tax implications.
Assume the Mortgage in Your Name
Another option is to formally assume the mortgage by taking over the loan in your name. Here is how assumption works:
- Your parents must agree to the assumption and their lender must approve you.
- You become legally responsible for making the monthly payments.
- The loan terms may change after assumption.
- Your parents transfer the home and mortgage to you through a gift deed.
Assuming the mortgage results in you becoming the legal owner. It is more complicated than gifting payments, but can make sense if your parents cannot afford the home.
Pay Off the Mortgage and Take Ownership
Finally, you can pay off the mortgage entirely and also take ownership of the home. Here are the basic steps:
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Obtain a payoff quote from your parents’ lender.
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Take out a new mortgage in your name for that payoff amount plus home value, if needed.
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Pay off your parents’ mortgage with your new loan proceeds.
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Have your parents transfer the home to you via a gift deed showing $0 for tax purposes.
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You are now legal owner and can live in or rent out the property.
This approach may require extra steps if you want to purchase rather than gift the home. But it lets you gain ownership and a new mortgage in your name.
Is Paying My Parents’ Mortgage a Good Idea?
Paying off your parents’ mortgage can be a huge help for them financially. But make sure you consider the implications:
Pros
- Allows your parents to pay off their mortgage faster
- Saves them money on interest payments
- Frees up retirement income if the home is paid off
- Can be done anonymously as a gift
Cons
- Large gifts may trigger IRS tax reporting
- Could cause disagreements over home ownership
- Requires trusting your parents with money
- No guarantee you will inherit the home
Think carefully and talk through all options with your parents and a financial advisor before moving forward. Make sure you set clear expectations about home ownership and inheritance. While paying their mortgage can be rewarding, you want to avoid potential conflicts down the road.
Make a Plan to Gift Home Equity
Gifting money to pay off your parents’ mortgage can significantly help their retirement. Make sure you understand the legal and tax implications involved. Talk to your parents and a financial planner to decide if this type of gift aligns with your financial goals and their needs. With proper planning, paying their mortgage could be a great way to provide long-term support.
Gifting Mortgage Payments
- 1 Ask to see the terms of the mortgage. Although there are ways to quietly find out the terms of the mortgage, if the homeowner knows that you are paying the mortgage, it is easiest to simply ask. You will want to see a current mortgage statement to determine how much money is still owed on the mortgage.[3]
- Creditors are legally required to send a monthly statement that includes a complete breakdown of money owned, payment history, and the breakdown of principal and interest.[4]
Dave Ramsey, Financial Advisor I recommend a fixed-rate, 15-year mortgage, and that your monthly payment be no more than 25% of your take-home pay. This keeps you from getting in over your head and helps you pay off your mortgage quickly so you can move on to other financial goals. - 2 Find the contact information of the lender and the mortgage account number. Returning to the account statement, find the name and contact information of the lender, so you know where to send payment. Look for the account number as well, so that you can identify what mortgage you are paying off.
- 3 Send payment. There are now a variety of convenient ways to pay a mortgage once you have the creditor’s information and the account number of the mortgage.[5]
- Most banks now prefer online payments. Simply go to the bank’s website and input your account information to pay the balance of the mortgage.
- Similarly, you can find the bank’s phone number and pay the bill by phone.
- Find the bank’s address to mail a check. Send a check or cashier’s check. Mail the check via certified mail to confirm receipt. Make sure that you write down the name and address of the debtor and their account number in the memo section of the check so that the bank knows which mortgage you are paying.
- With the account number in hand, you can also pay a mortgage in person at the bank. This might be the most comfortable method for those making large payments.[6]
- 4 Ask for confirmation. Ask the mortgage for receipt of the transaction. Request a copy of the account balance to confirm that the whole mortgage was paid off.
- 5 Keep track of all correspondence. Retain all documents associated with this gift, including a copy of the check and receipt of payment. You will want to give this documentation to your tax preparer.
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Assuming a Mortgage
- 1 Research your credit. To assume someone’s mortgage, the bank will need to find your credit score acceptable. Order a credit report for yourself and your spouse online.
- To assume someone elses mortgage you will ideally want to have approximately credit score as the current debtor or perhaps a bit higher. A credit score in the mid 600s is generally sufficient to be approved for a mortgage.[10]
- 2 Speak to the lender about assuming the mortgage. Many mortgage contracts include a “due on sale” clause that requires the entire sum of the mortgage to be paid shortly after it is transferred. However, some lenders will be willing to make exceptions for qualified applicants with good credit. Also, some types of loans can always be assumed.[11]
- Even when there is a due on sale clause, you can still assume a mortgage if: you are assuming your parents’ mortgage, transferring the property to a relative after the death of the borrower, transferring the property between spouses, or transferring it according to the terms of a divorce.[12]
- FHA and VA loans are always assumable.
- If there is a due on sale clause in the mortgage, but the lender is fine with you assuming it, they might still change the terms of the mortgage, possibly increasing the interest rate.[13]
- 3 Find other lending options. In some cases, you might not be able to assume an existing mortgage, but can still get a new one to cover the cost of the house. Discuss this with the original lender, but also research alternative lenders in the area.
- 4 Compare your mortgage options. Examine the terms of the assumed mortgage, if that proved to be an option, versus the terms of a new mortgage. Assuming a mortgage may allow you to get lower interest rates than are currently available and to avoid large closing costs.
- There is no general rule as to which option will be better, however, because interest rates are currently higher than they were in recent years, it is quite likely that assumable mortgage will have rates much lower that you could currently find.
- The drawback to assumable mortgages is that often the original borrower will still be liable for the mortgage. If the mortgage is not paid it can affect their credit score. Try to get a written release of liability from the lender and keep it for your records.[14]
- 5 Apply for the mortgage. Pick the best option and complete the requisite paperwork. This should be done through the lender at the same time you are closing the sale of the home with the homeowner.
- 6 Sign a contract that transfers ownership of the house from the current homeowner to you. You should have a lawyer look at this contract and negotiate changes before finalizing it.
- 7 Begin making mortgage payments for the assumed mortgage. Send on-time payments to the lenders payment address. Consider signing up for online banking to make the process easier.
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FAQ
Can anyone pay off someone’s mortgage?
Yes, you can have someone else pay the mortgage on a house that you have purchased, but there are some legal and financial considerations you should be aware of. If you are the owner of the property and have taken out the mortgage in your name, you are ultimately responsible for making the mortgage payments.