Shared ownership is not a new idea but is becoming increasingly popular especially amongst millennials. Shared ownership is essentially for people who would like to own their own home but cannot afford to buy on the open market.
Shared ownership can be a way of getting onto the housing ladder for many people. But, there are a few things you should consider first.
When you buy a home with others, you’re not just entering into a living arrangement: You’re entering a legal relationship as well. How you own a home together determines how you can get financing, what your rights and responsibilities are, how and to whom you can each sell or leave your share of the property, and more.
Financing Options for a Co-Owned House
If you purchase a single-family home, you and your co-owner will likely have to take out one mortgage loan.
When you sign a mortgage with someone else, you become jointly and severally liable for the mortgage, which means that both of you are liable for the full amount. If one owner doesn’t pay, the other will have to pick up the slack to avoid a delinquency on the account, penalties, or even foreclosure. Before signing on to a shared mortgage, you and your co-owner should have a serious talk about your financial situations and how you’ll handle it if one owner can’t keep up with the payments. You might decide that one owner can make the other owner’s missed payments and either be reimbursed or obtain a higher percentage of ownership in exchange. The best way to avoid problems is to buy a house in your price range, make sure both of you can comfortably afford the mortgage and other expenses, and create an emergency fund (or get insurance) for unexpected events like a job layoff or medical problem.
You should also think about how you’ll make mortgage payments if one of you dies. One strategy is to take out life insurance policies on each other, so that if one owner dies, the other will be able to keep up the payments.
There are many ways to divide your responsibility for financing. You can agree to handle things in whatever way suits your needs best. Although you will be jointly and severally liable for the mortgage, you might decide that one of you will pay a larger share to reflect ownership of a larger percentage of the house, to reflect use of more of the shared space, or simply because that person can afford to pay more. Also, you don’t have to split your down payment and ongoing mortgage payments the same way. For example, Joe might have significant savings but a low monthly income. Linda might have very little savings, but a high paying job. In this situation, Joe could pay 75% of the down payment but assume a smaller portion of the mortgage payments.
Zoning rules can conflict with shared housing in several ways:
* restrictions on how many people can live in a home and how many unrelated people can live together
* restrictions on the number of dwelling units on a parcel of land
* limits on building sizes and the number of buildings you can have on each lot, as well as building height and proximity to the property line, and
* extra requirements for multi-unit housing, such as a certain number of off-street parking. spaces.
Legal Restrictions on Shared Housing
Municipal laws may impose some restrictions on whether and how you may share housing in a particular neighborhood. If you move into a planned community, its rules may also limit your shared housing options.
What Is a Shared Equity Mortgage?
A shared equity mortgage is an arrangement under which a lender and a borrower share ownership of a property. The borrower must occupy the property. When the property sells, the allocation of equity goes to each party according to their equity contribution. Each party also shares losses on the sold property.
How a Shared Equity Mortgage Works
A shared equity mortgage is an attractive option for homebuyers who are planning on being an owner-occupant. This shared mortgage grants them access to properties whose values might otherwise be beyond their means. In most parts of the U.S. owner-occupants must also pay a fair market rent to the co-investor proportional to the share of equity not owned by the owner-occupant.
The lender, or owner-investor, also stands to gain from a shared equity mortgage. The equity contribution is an investment, and the lender will take a proportional stake in any gains over the lifetime of the mortgage. If the owner-investor is contributing to mortgage interest, they will likely be able to deduct that interest from their taxable income. The owner-investor can also apply depreciation of the property to their taxes.
Advantages and Disadvantages of a Shares Equity Mortgage
For many years, shared equity programs have been offered by affordable housing associations and municipalities in order to facilitate homeownership among low-income individuals and first-time buyers. The programs either provide funds for the shared equity investment or connects potential buyers with private lenders willing to co-invest.
Urban Institute research shows that these programs are effective in increasing homeownership among the targeted communities, with the added benefit of assisting potential buyers in assessing their own readiness to purchase a home. More recently, private lenders have entered the shared equity mortgage market, especially in high-cost markets such as San Francisco and New York City.
Another commonly shared equity arrangement is between a parent and a younger, or first-time buyer family member. This type of mortgage is a beneficial arrangement for the lending family member because it allows them to avoid the tax consequences of a substantial financial gift, while potentially earning a return on that capital. High-income adult children can also take advantage of this financing option to contribute to a retirement property for aging parents.
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