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Co-ownership can solve down payment shortage

Anyone who's in the market for a first home knows that it can take some real creativity to come up with the necessary funds to get into a house. Low interest rates and escalating land values have driven up prices in most markets, and that means higher down payments.

So how is a young person supposed to buy a house?

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There are many conventional strategies, including having a parent co-sign on the loan. But that can be risky for the co-signer, who has all the responsibilities but none of the benefits of obtaining a mortgage. If there's a need for a tax deduction, it may make more sense for parents to actually become co-owners of the property.

Of course, there are some potential downsides to co-ownership, including family fall-outs and possibly a higher interest rate. But there are plenty of advantages too.

Co-ownership agreements are done every day. Usually the borrowers are husband and wife, or two people in a relationship who decide to buy a house together. The thing they have in common is that they plan to live in the house, known in mortgage lingo as owner occupancy.

Helping children find home
Parents who decide to sign on the bottom line as a co-owner generally aren't planning to move in. That makes the deal investment property, says Christopher Shaxted, executive vice president of Lakewood Homes in Chicago. It's a great way, he says, for a first-time home buyer to buy a larger house.

"Where I see it is a first-time buyer goes out, buys a house in line with their budget or does a little stretch, but it's not as much as they should have because in five or seven years they need a bigger house, but they like where they live," he says. "This gives them an opportunity to upsize."

The concept definitely has merit in certain parts of the country. That's the situation that CPA and tax attorney Scott Haislet sees in San Francisco. Older residents who bought their houses decades ago and own them outright have seen astronomical appreciation in the value of their homes. Meanwhile, their children are shut out of the market.

"Around here, it's very difficult for someone who has never owned property to get into a house," he says. "For a lot of younger people, the best source of assistance often will be a parent with an open mind and a lot of equity."

In New York City, they call them 'kiddie co-ops,' says Ellen Bitton with Park Avenue Mortgage Group. She sees them in about one in every 25 applications. Usually, she says, there's an ulterior motive. A parent is looking for a way to give his child some money, or he recognizes that his child's own credit history isn't going to be enough to qualify for a loan.

"Those are the two biggest things," she says. "There's always a possibility the parents want the investment. They might be able to take more of the tax advantage. The way it's been explained to me, as long as only 100 percent of the tax deduction is taken, the IRS doesn't care who takes it."

Shaxted says the arrangement has been around since the 1980s, when interest rates were through the roof.

Parents as landlords
Today, not many people take advantage of it, but it's worth considering if you're in a higher tax bracket and looking for deductions.

"It works best for people just starting off with relatively low incomes who don't care as much about the tax benefit as the person in the 36- to 40-percent tax bracket," he says.



-- Posted: June 19, 2003




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