The end of the federal tax credit for homebuyers is fast approaching. That means crunch time for parents who want to help their kids buy a place as inexpensively as possible.

First-timers comprised 47% of all buyers last year, according to the National Association of Realtors. That's the highest percentage on record. Many young buyers are getting down payment money from parents, some of whom are co-signing loans too. But parents, grandparents and other relatives who want to help should educate themselves before jumping in, for everybody's safety.

Gifting Game Takes Strategy

Loan rules have tightened in the past year, say mortgage specialists and real estate agents, and present a moving target. Buyers with gift money or a possible co-signer must meet specific requirements.

"Loans are much harder to get than a year ago," said Eric Glassoff, an agent with Coldwell Banker in Brookline, Mass. Now lenders are "questioning everything."

Etiquette dictates that gifts should be accepted graciously, without questions. Not so, say today's lenders.

If a parent or other relative wants to contribute gift money for a down payment, he or she must be prepared to show where that money is coming from, including providing investment account or bank statements. And gifts above $13,000 are taxable, according to Internal Revenue Service rules for 2010.

Mortgage bankers say the paperwork involved ends up irritating a lot of gifters.

"We used to just get a gift letter signed, now we need a bank statement to show they have the funds to give," said Faramarz Moeen-Ziai, a mortgage banker at Bank of Commerce Mortgage, in San Ramon, Calif. "Parents are uncomfortable with this. But with today's underwriting guidelines everything is triple-checked."

Moeen-Ziai says 30% of his borrowers receive gift money to help them with their home purchases. And he says the tax credit is "a real carrot" for homebuyers.

Under the program, first-time buyers of a principal residence have until April 30, 2010 to purchase one priced less than $800,000 and get up to an $8,000 tax credit. Repeat buyers can get up to a $6,500 tax credit. This year's annual income limits for first-time and repeat buyers rose from $75,000 for a single taxpayer to $125,000, and from $150,000 to $225,000 for a married couple filing jointly.

How much relatives can help varies with the type of loan sought.

Tighter lending standards applied after the housing bubble burst have made loans insured by the Federal Housing Administration the most popular option for people getting their first home. Fifty-five percent of entry-level buyers in a 2009 NAR study said they financed their purchases with an FHA loan. These are available through a variety of traditional lenders.

What's New In The Fine Print

But even the FHA has been tightening its lending, and more rule changes are coming.

Starting April 5, FHA will cap seller contributions toward a buyer's closing costs at 3%. This is down from the previous limit of 6%. And FHA's mortgage insurance is going up.

FHA borrowers must make monthly payments toward an annual mortgage insurance premium of 0.50% to 0.55% of the loan amount. But they also pay an upfront mortgage insurance premium, which rises on April 5 to 2.25% of the loan, from 1.75%. On a $400,000 loan, that would increase the upfront premium to $9,000 from $7,000 — though the fee can be financed.

Also beginning April 5, FHA borrowers with a credit score of 580 or less must put at least 10% down. However, mortgage bankers say that most lenders doing FHA loans require a credit score higher than 580 anyway.

This higher down payment stipulation for low scorers may push the actual credit score that lenders require even higher, "which could have a big impact" on potential buyers, said Steve Aranda, a loan officer with Premier Mortgage Bankers, in Temple City, Calif.

All lenders "overlay" their credit requirements on top of the FHA minimums, says Patrick Moore, the Las Vegas branch manager of W. J. Bradley Mortgage Capital. Lenders' minimum FICO credit score for an FHA loan was 620, but "now most banks are requiring 640," Moore said.

FHA, Fannie Or Freddie?

FHA loans are attractive to first-timers because with a good credit score borrowers can get into a house for as little as 3.5% down. Also, FHA borrowers can receive all of their down payment in gifts from relatives or nonprofit agencies and a relative or other benefactor can co-sign an FHA loan.

Mortgages backed by Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) have even tighter lending guidelines. For these types of loans, the primary borrower must come up with 5% of the down payment, independent of any gifts. Any loans with less than 20% down must have private mortgage insurance.

And of course the appraisal process can be a stumbling block in obtaining any loan. The property needs to appraise at the selling price. If it doesn't, a lender may ask a borrower to come up with a higher down payment.

Co-Signer Is No Cure-All

First-time buyers often think having a relative co-sign their mortgages will help if they have credit difficulties. Not so.

Lenders use the lowest credit score on the mortgage application, Aranda says. And while FHA and Freddie Mac loans allow co-signers, currently Fannie Mae's loan system does not accommodate co-signing, says Moeen-Ziai.

On the kind of loans that allow co-signing, the co-signer must provide a credit score, verify income and demonstrate an acceptable debt-to-income ratio. Borrowers often "don't understand that a co-signer has to qualify just as they would," Aranda said. "The fact that a co-signer makes a lot of money doesn't necessarily mean that he or she has good financials."

Even with sterling credentials, a co-signer can't ensure that a borrower will get a mortgage.

"Lenders have tightened up underwriting standards such that buyers with weaker credit who may have been able to secure a mortgage with a co-signer before will simply be turned down now, even if there is a willing co-signer," said Paul Bishop, NAR's managing director of research.

Co-signers often don't realize that any loans they sign for are as much their debts as the primary borrowers'. In some states, a creditor can attempt to collect the debt from the co-signer before collecting from the primary borrower. Also, the debt will affect a co-signer's ability to do other borrowing. And a co-signer can be sued for the debt and any collection fees or penalties.

Lastly, if a co-signer puts up collateral on the debt, that property could be at risk if the primary borrower defaults.

The end of the federal tax credit for homebuyers is fast approaching. That means crunch time for parents who want to help their kids buy a place as inexpensively as possible.

First-timers comprised 47% of all buyers last year, according to the National Association of Realtors. That's the highest percentage on record. Many young buyers are getting down payment money from parents, some of whom are co-signing loans too. But parents, grandparents and other relatives who want to help should educate themselves before jumping in, for everybody's safety.

Gifting Game Takes Strategy

Loan rules have tightened in the past year, say mortgage specialists and real estate agents, and present a moving target. Buyers with gift money or a possible co-signer must meet specific requirements.

"Loans are much harder to get than a year ago," said Eric Glassoff, an agent with Coldwell Banker in Brookline, Mass. Now lenders are "questioning everything."

Etiquette dictates that gifts should be accepted graciously, without questions. Not so, say today's lenders.

If a parent or other relative wants to contribute gift money for a down payment, he or she must be prepared to show where that money is coming from, including providing investment account or bank statements. And gifts above $13,000 are taxable, according to Internal Revenue Service rules for 2010.

Mortgage bankers say the paperwork involved ends up irritating a lot of gifters.

"We used to just get a gift letter signed, now we need a bank statement to show they have the funds to give," said Faramarz Moeen-Ziai, a mortgage banker at Bank of Commerce Mortgage, in San Ramon, Calif. "Parents are uncomfortable with this. But with today's underwriting guidelines everything is triple-checked."

Moeen-Ziai says 30% of his borrowers receive gift money to help them with their home purchases. And he says the tax credit is "a real carrot" for homebuyers.

Under the program, first-time buyers of a principal residence have until April 30, 2010 to purchase one priced less than $800,000 and get up to an $8,000 tax credit. Repeat buyers can get up to a $6,500 tax credit. This year's annual income limits for first-time and repeat buyers rose from $75,000 for a single taxpayer to $125,000, and from $150,000 to $225,000 for a married couple filing jointly.

How much relatives can help varies with the type of loan sought.

Tighter lending standards applied after the housing bubble burst have made loans insured by the Federal Housing Administration the most popular option for people getting their first home. Fifty-five percent of entry-level buyers in a 2009 NAR study said they financed their purchases with an FHA loan. These are available through a variety of traditional lenders.

What's New In The Fine Print

But even the FHA has been tightening its lending, and more rule changes are coming.

Starting April 5, FHA will cap seller contributions toward a buyer's closing costs at 3%. This is down from the previous limit of 6%. And FHA's mortgage insurance is going up.

FHA borrowers must make monthly payments toward an annual mortgage insurance premium of 0.50% to 0.55% of the loan amount. But they also pay an upfront mortgage insurance premium, which rises on April 5 to 2.25% of the loan, from 1.75%. On a $400,000 loan, that would increase the upfront premium to $9,000 from $7,000 — though the fee can be financed.

Also beginning April 5, FHA borrowers with a credit score of 580 or less must put at least 10% down. However, mortgage bankers say that most lenders doing FHA loans require a credit score higher than 580 anyway.

This higher down payment stipulation for low scorers may push the actual credit score that lenders require even higher, "which could have a big impact" on potential buyers, said Steve Aranda, a loan officer with Premier Mortgage Bankers, in Temple City, Calif.

All lenders "overlay" their credit requirements on top of the FHA minimums, says Patrick Moore, the Las Vegas branch manager of W. J. Bradley Mortgage Capital. Lenders' minimum FICO credit score for an FHA loan was 620, but "now most banks are requiring 640," Moore said.

FHA, Fannie Or Freddie?

FHA loans are attractive to first-timers because with a good credit score borrowers can get into a house for as little as 3.5% down. Also, FHA borrowers can receive all of their down payment in gifts from relatives or nonprofit agencies and a relative or other benefactor can co-sign an FHA loan.

Mortgages backed by Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) have even tighter lending guidelines. For these types of loans, the primary borrower must come up with 5% of the down payment, independent of any gifts. Any loans with less than 20% down must have private mortgage insurance.

And of course the appraisal process can be a stumbling block in obtaining any loan. The property needs to appraise at the selling price. If it doesn't, a lender may ask a borrower to come up with a higher down payment.

Co-Signer Is No Cure-All

First-time buyers often think having a relative co-sign their mortgages will help if they have credit difficulties. Not so.

Lenders use the lowest credit score on the mortgage application, Aranda says. And while FHA and Freddie Mac loans allow co-signers, currently Fannie Mae's loan system does not accommodate co-signing, says Moeen-Ziai.

On the kind of loans that allow co-signing, the co-signer must provide a credit score, verify income and demonstrate an acceptable debt-to-income ratio. Borrowers often "don't understand that a co-signer has to qualify just as they would," Aranda said. "The fact that a co-signer makes a lot of money doesn't necessarily mean that he or she has good financials."

Even with sterling credentials, a co-signer can't ensure that a borrower will get a mortgage.

"Lenders have tightened up underwriting standards such that buyers with weaker credit who may have been able to secure a mortgage with a co-signer before will simply be turned down now, even if there is a willing co-signer," said Paul Bishop, NAR's managing director of research.

Co-signers often don't realize that any loans they sign for are as much their debts as the primary borrowers'. In some states, a creditor can attempt to collect the debt from the co-signer before collecting from the primary borrower. Also, the debt will affect a co-signer's ability to do other borrowing. And a co-signer can be sued for the debt and any collection fees or penalties.

Lastly, if a co-signer puts up collateral on the debt, that property could be at risk if the primary borrower defaults.

WASHINGTON – Americans are recovering their shrunken wealth — gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

The Federal Reserve said Thursday that net worth rose 1.3 percent in the fourth quarter to $54.2 trillion. It marked the third straight quarter of gains. But economists say consumers would need a stronger and more prolonged increase in their wealth to persuade them to ratchet up spending.

Net worth had risen by a more robust 4.5 percent in the second quarter of 2009 and an even faster 5.5 percent in the third quarter. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.

Even with the gain, Americans' net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans' vast loss of wealth from the worst downturn since the 1930s.

Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

During the recession, which began in December 2007, household net worth had plunged as low as $48.5 trillion in the first quarter of 2009. Stock holdings and home values nose-dived. As their net worth evaporated, Americans felt less inclined to spend.

For all of last year, consumer spending dropped 0.6 percent. This year, as wealth, the economy and financial conditions slowly recover, consumer spending is projected to grow around a modest 2.2 percent, according to the National Association for Business Economics.

By contrast, in 1983, when the economy was recovering from the 1981-82 recession, consumer spending surged 5.7 percent. Unlike past rebounds led by ordinary shoppers, this one so far has been driven more by spending from businesses, foreigners and — until it runs out — government stimulus. Consumers have been spending more lately. But they remain cautious.

"It would take a string of increases of a size that they believe can continue and that they can have faith in for consumers to really boost their spending," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Each dollar increase in household wealth translates into roughly three to four cents of consumer spending over two years, Hoyt said.

That isn't much.

Just ask Marcia Karon, 55, of Atlanta. She's felt little benefit from the economic rebound or the stock market. Her family's finances are being crimped in other ways. Her husband has taken two pay cuts in the past year, their property taxes remain high and "everything else is going up," she says.

"Things are tight," says Karon, who works at home as a calligrapher and bookkeeper. "Over the last year we've had to go through what little savings we had set aside just to get by."

Not until 2012 does Hoyt think household wealth will return to its pre-recession levels. A severe setback to the economy could delay it further, he added.

Concern about their diminished net worth also led many Americans to reduce their borrowing last year. Household debt — including mortgages, credit cards, auto and student loans — contracted at an annual rate of 1.75 percent in 2009, the Fed report said. It was the first annual decline on record.

Benefiting most in the fourth quarter were those invested in the stock market. The Standard & Poor's 500, a broad barometer of stocks, climbed 5 percent in the quarter. The Dow Jones industrial average gained 7 percent.

But the gains have slowed this year. The two indexes have risen just 2 percent and 1 percent, respectively. Even with the market's rally, the S&P 500 is still 27 percent off its October 2007 peak.

Holders of 401(k) retirement accounts have recovered somewhat from the walloping they took in the meltdown. But even with continued contributions to those accounts, many are still struggling. Average account balances for 401(k) contributors ages 45 and older remained 2 to 3 percent lower at the end of December than at the end of 2007, according to the Employee Benefit Research Institute.

Some have fared better.

Julie Arnheim, 43, of Los Altos Hills, Calif., returned to work a year ago because the economy had beaten down her and her husband's finances. Now, thanks to the stock market's rebound, their net worth has come all the way back from a 30 to 35 percent drop.

"We've lost a year and a half of growth, but it's easy to be upbeat," says Arnheim, an entrepreneur. "There's a lot of retired people I know who were hurt, and they don't have the longevity for the market to come back and keep growing."

___

Carpenter reported from Chicago.