If you saw a nice home for sale near a college or university before your youngster began the fall semester, perhaps you could help that child — or another potential first-time home buyer in your family — get into the door of that home while taking advantage of a terrific tax incentive at the same time.
In a recent article, we explored the possibilities of owning an investment home near a college campus and having a college student live there as an alternative to an on-campus dormitory. What if your child were handed a $8,000 tax credit, or down-payment incentive, to purchase that home? Would that change the picture?
There are still several loan programs that allow a nonoccupant co-borrower (parent). The rules vary depending on the program, but the most popular option is still a Federal Housing Administration loan. Here is a breakdown on the guidelines:
FHA will allow a nonoccupant co-borrower (on the loan and on title) or co-signer (on the loan but not on title).
The minimum down payment is 3.5 percent of the sales price, subject to county limits.
Qualification is based on the borrower and co-borrower’s income and debts combined.
The co-borrower/co-signer may not be a party that has an interest in the transaction (e.g., the seller, builder, real estate agent). Exceptions may be granted if the seller and co-borrower/co-signer is related to the owner by blood, marriage or law.
According to the Internal Revenue Service, a child who is a first-time home buyer is entitled to the tax credit even if the parent co-signs the loan. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000. It can also be applied to the down payment once 3.5 percent of the purchase price comes from other funds.
For example, let’s say the home’s sale price is $300,000. The buyer would need a minimum of $10,500 ($300,000 x 3.5 percent) to close the sale via an FHA loan. However, if an additional $8,000 were applied via the tax credit, the amount borrowed would be lower ($281,500 instead of $289.50). Amortized over 30 years at 6 percent interest, monthly payments would amount to $1,687.73. Add an additional chunk for mortgage insurance, taxes and insurance and the total monthly housing obligation would be $2,100 — or $700 apiece for three occupants — not including food.
That’s not too bad. While some students might be able to live in a dorm for less, remember that this would be building a nest egg for the youngster’s future. In order for the parent-student partnership to work, students must be responsible landlords. An Animal House can mean thousands in repairs and angry neighbors.
A first-time homeowner can also choose to take the tax credit on his or her federal income taxes. A tax credit differs from a tax deduction in that a credit is a dollar-for-dollar reduction and a tax deduction reduces taxable income.
A first-time buyer, as defined by the Internal Revenue Service, is anyone who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years, but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
In addition, first-time home buyers must purchase the property from a source unrelated to them. For example, they cannot purchase the house from a spouse, parent, grandparent or child.
Remember, parents may co-sign a loan and help their children get a significant first-time buyer tax deduction or down payment assistance. The deadline expires Nov. 30.
Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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