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 homebuyer 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 an $8,000 tax credit, or downpayment incentive, to purchase that home? Would that change the picture?
There are still several loan programs that allow a "non-occupant" co-borrower (parent). The rules vary depending on the program, but the most popular option is still an FHA-insured loan. Here is a breakdown on the guidelines:
- FHA will allow a non-occupant co-borrower (on the loan and on title) or co-signer (on the loan but not on title).
- The minimum downpayment is 3.5 percent of the sales price, subject to county limits.
- Qualification is based on the combined income and debts of the borrower and co-borrower.
- The co-borrower/co-signer may not be a party that has an interest in the transaction (e.g., the seller, builder or real estate agent). Exceptions may be granted if the seller and co-borrower/co-signer are related to the owner by blood, marriage or law.
According to the Internal Revenue Service, a child who is a first-time homebuyer 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 downpayment 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 multiplied by 3.5 percent) to close the sale via an FHA-insured loan. However, if an additional $8,000 were applied via the tax credit, the amount borrowed would be lower ($281,500 instead of $289,500). 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. …CONTINUED
That’s not too bad. While some students might be able to live in a dorm for less, remember that young women rarely eat dormitory food anyway and 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 simply 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 homebuyer 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 homebuyer 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 homebuyer.
In addition, first-time 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 downpayment assistance. The deadline is 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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