Young buyers often rely on family assistance in raising the money for a down payment on their first home. Until recently, though, they still had to come up with a big chunk of their own dough in order to qualify for a conventional loan.

Now that's changing. United Guaranty, a provider of private mortgage insurance (PMI) recently changed its guidelines to allow buyers to obtain their entire down payment through a gift. Other private mortgage insurers are expected to follow.

Under the insurer's previous guidelines, buyers had to be able to show that down payment funds equal to at least 2 percent of the purchase price came from their own money, in addition to any gift funds. For a Fannie Mae-backed mortgage with the minimum 5 percent down payment, that meant that at least 2 percent had to come from the actual buyer and 3 percent could be a gift from their parents or someone else.

Cheaper than FHA loans

The change allows borrowers relying on gift funds for their down payment to reduce their overall lending costs. While the FHA has long allowed the use of gift funds for the entire down payment on its home loans, recent increases in upfront and ongoing mortgage insurance fees charged on FHA mortgages have made them costlier than comparable conventional mortgages backed by Fannie Mae and Freddie Mac.

Homebuyers who wish to use gifted funds for a down payment must meet stricter credit limits other borrowers. Fannie Mae requires that borrowers using gift money have a minimum credit score of 720, compared to 620 for those using their own funds. All persons listed as borrowers on the loan must reside in the home and no second mortgages on the property are allowed.

Mortgage insurance is required on home loans with less than a 20 percent down payment. Private mortgage insurers such as United Guaranty insure loans backed by Fannie Mae and Freddie Mac. The FHA handles its own mortgage insurance on the home loans it backs and has its own requirements.

Published on October 21, 2008