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My parents said they'd give my husband and me down payment for a house as a wedding present next month. We want to buy a house as soon as we can but we've only saved about $2,000 so far. Can we use my parents' money for everything or do we have to have our own savings, too?

Congratulations on your wedding and your nice parents. The rules about gift money depend on the kind of loan you want to use to finance your home purchase. Whichever loan program you choose, your parents will need to provide a letter with the gift funds for your lender to prove that it's not a loan and you won't have to pay them back.

FHA loan requirements allow all of your down payment to come from gift funds and, good news for your parents, you only need a down payment of 3.5 percent. You can wrap your closing costs and fees into the loan, too. The downside of taking out an FHA loan, though, is that they require mortgage insurance. The up-front mortgage insurance is 1.75 percent of your loan amount, or $3,500 on a $200,000 home. You'll also need to pay monthly mortgage insurance of 1.25 percent, which comes to $209 per month on a $200,000 home. An FHA lender can provide you with numbers for your individual circumstances.

Conventional loan requirements depend on the size of your down payment. Most conventional loans require a down payment of five to 20 percent. If you're making a down payment of less than 20 percent of the home price, then you'll need to have at least 5 percent of the payment coming from your own funds. However, if your parents are so generous that they're willing to make a down payment of 20 percent or more, then all of the funds can come as a gift. Keep in mind that if your conventional loan has a down payment of less than 20 percent, you'll also need to pay mortgage insurance, although those payments are typically lower than the FHA's mortgage insurance.

Since the rules are pretty complicated, be sure to consult with a lender to find out how much you can borrow for your mortgage and how much your parents will be allowed to contribute to your home purchase.






 
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