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First-Home Help

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Posted On: 02/25/2009

Q: I would like to help my son buy his first home. What methods are available to help him?

A: Helping a family member buy a home is not uncommon. A 2008 study by the National Association of Realtors shows that 26 percent of all first-time buyers had help from a relative or friend. However, it’s important to say that with the financial melt-down lender standards have tightened and more cash may be needed to acquire a home. The NAR study shows that a typical 2008 first-time buyer put down 4 percent – that’s up from 2 percent in the 2007 study. You can bet that down-payment averages will rise in 2009.

Here are some strategies to consider:

First, anyone can make a $12,000 tax-free gift to anyone else each year. For a married couple, that’s $24,000 a year to one person. Gifts can be tricky so get specific advice from a tax professional.

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Second, the lender will ask you to provide a “gift” letter ending any claim for principal or interest for money you provide. Otherwise, the money will be treated as a loan for application purposes and reduce the ability of your son to qualify for a mortgage. (If you have made a loan to your son that loan must be disclosed.)

Third, your son should keep gift money in an account so that it’s “seasoned” over time. If the money has been in his name for a sufficient time it will be considered “his” and a gift question may not arise. Ask lenders for specifics.

Fourth, you can buy with your son as a co-owner under a concept called “equity-sharing.” Established under the Black Lung Benefits Revenue Act of 1981, equity sharing allows a property to be owned by an owner-occupant (the resident) and a non-owner occupant (an investor). The resident gets to write off a portion of the mortgage and property taxes while the investor gets real-estate write-offs plus some depreciation. The investor has income from the resident for use of the investor’s portion of the property. To get a proper written agreement, speak with an attorney who handles real estate.

Fifth, ask lenders about first-time buyer loans in your state. Such programs generally have limited funds and are offered on a first-come, first serve basis.

Sixth, look into fixed-rate FHA financing. A traditional loan for first-time buyers, fixed-rate FHA loans are a safe mortgage format that have steady monthly costs and no prepayment penalty.

Seventh, rather than a home or condo, consider a property with two to four units. Your son will live in one and thus qualify for low-cost owner financing while the additional unit or units can be rented out to provide income plus your son will learn something about landlording. This strategy may make more sense in some areas than in others, so speak with local real-estate brokers regarding the local rental market.

Eighth, as a condition of the loan require your son to take the basic real-estate licensure class for your state. This will teach him much about real estate and mortgage financing.

Q: Our local real-estate values have dropped, however I don’t believe that prices have fallen evenly or equally throughout our area. Instead I think there are differences between single-family homes and condos, between central areas and homes in the distant suburbs and probably other categories as well. How do I get a realistic valuation of my house if I want to sell in the next few months?

A: One of the most important services provided by real-estate brokers is local data and information. For instance, several brokers provide sale information for homes in my little community, as well as listings of homes now for sale. This localized data is far more relevant to home prices on my street than general metro-area prices. As to nationwide trends, they’re interesting but may not reflect metro or local pricing patterns.

In many markets prices are volatile, thus setting a sale price now but selling in a few months may mean your valuation is inaccurate. As an alternative, visit neighborhood open houses to get a general sense of local real-estate values and the repairs and fix-ups you need to be competitive. Speak with neighborhood brokers and then ask a few to suggest how they would market the home, how they would value it and how they justify their valuations. Then pick the broker you think will best represent your interests when you sell. Before you put the home on the market get updated market information to make sure your real estate is properly priced.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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