Fannie Mae changed their rules last month regarding gift funds. The new rules state that you can use gift funds for the entire down payment and no longer need 5% of your own money. There is a problem with that….
If you have less than 20% down, you need private mortgage insurance. MI companies have their own rules that you also have to follow. MI companies do not allow for gift funds for the entire down payment. They require at least 3-5% of your own money into the transaction. If you have 20% down in a gift, you do not need mortgage insurance. But if you have less than that, you need to follow the mortgage insurance rules along with the mortgage company guidelines.
So for now – you still need 3-5% of your own money on a conventional mortgage. FHA and VA allow for gift funds for the entire down payment.
Another example of this is debt to income ratios. With automated underwriting approvals, you may be able to go over 45% (but not over 50%) for debt to income ratios, however MI companies will not issue mortgage insurance over 45% DTI. Mortgage companies may not require reserves (liquid assets left after your down payment and closing costs), however many MI companies want to see at least two months of reserves. The mortgage company may not require a rental history, but the MI company might.
If you are going to use a conventional loan, you need to make sure you are approved by both the mortgage company and the mortgage insurance company. It's kind of like buying a car – you can get financed, but because of your driving history, you may not be able to get car insurance!
FHA and VA do not have separate requirements – FHA issues it's own mortgage insurance and VA loans have a VA funding fee.
We don't know if the private mortgage insurance companies will change their rules, but for now we have to abide by what the current rules are. The rules have changed for everyone over the last couple of years, so we may see some mortgage insurance companies adjust their positions on gift money – but not yet!
