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Helping student buy first home could be a smart financial move

Tom Kelly

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 in the door of that home while taking advantage of a terrific tax incentive.

What if your child were handed an $8,000 tax credit or down-payment incentive to purchase an investment home near a college campus as an alternative to an on-campus dormitory? 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 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 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, such as the seller, builder or 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 IRS, 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 $8,000. It also can be applied to the down payment once 3.5 percent of the purchase price comes from other funds.

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 loan. However, if an additional $8,000 were applied using 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 $1,688. 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.

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 of dollars 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 IRS, 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 or 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 of you qualifies for the first-time home buyer tax credit.

But 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. They cannot buy 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 is a former real estate editor for the Seattle Times. His 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 of Stewart International.
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