Being able to purchase and own a home is very exciting, and one of the significant aspects of the mortgage industry is that there is a service out there for just about any situation that provides a platform for as many people as possible to become a homeowner! Think you are too young or too old, or you’ve had a few rough bumps in your life that prevent you from owning a home? Luckily there is such as thing as Kiddie Condos that makes it possible for the college-aged child, an elderly parent, or a family member that is coming out of a difficult time in their life, to purchase a house.
Despite the name, it is not a condo, nor is it just for kids (silly rabbit!); but it is an FHA loan program that enables relatives to co-borrow for a home loan. Both borrowers hold title to the house, but only one of the borrowers can use the home as a primary residence. A Kiddie Condo loan is a non-occupying, co-borrower loan. Let me explain…
HELPING JUNIOR SAVE MONEY AND BUILD CREDIT
Originally, the idea of a ‘Kiddie Condo’ came about as a way to assist college-age adults who did not quite have the credit history or resources to purchase a home on their own. Also, parents were realizing that it was cheaper to purchase a home and rent out the rooms to other students than it was to pay for Junior to dole out money for room and board to the college or university. The only problem was, that for Mom and Dad to purchase a 2nd home, it meant that they would be taking out a mortgage for “investment” purposes, thus resulting in a higher interest rate and other restrictions. Not only that, Junior would not be taking on any of the financial responsibility of the home – legally. Nor, receiving the benefit of being responsible if he was the one actually paying the bills. Thus, the Kiddie Condo loan program was created. Junior can now purchase a home, if he has good credit/bill paying habits, with the help of Mom and Dad. The parents are co-owners (vs. a co-signer). Junior must occupy the home, BUT he can rent out extra rooms to help pay for his mortgage – all without Mom and Dad getting dinged for having an investment property. Now Junior (or Juniorette) is a home owner and building their own credit history.
OTHERS WHO CAN BENEFIT FROM KIDDIE CONDOS
College students are not the only ones who can benefit from a Kiddie Condo loan. When the economy took a nose dive in 2008, it created a lot of difficulties for many families. Lost jobs and over-financed/under-valued homes resulted in many families losing their precious house. Bankruptcies skyrocketed. After a few years, families were rebuilding their lives but still needed a little boost in purchasing a home. A Kiddie Condo loan paved the way to get back on their feet with the help of family members.
Other situations where a Kiddie Condo loan can come in handy are the elderly parents looking to Age In Place, families who faced a financial crisis due to injury or illness, loss of job/unemployment, special needs family members, and young adults looking to buy their first home. I recommend talking to a lender, such as Shelia Endres (Sendres@franklinamerican.com), to determine if your situation qualifies for a Kiddie Condo Loan.
BENEFITS AND QUALIFICATIONS
While a lender can give you more detailed information on this type of loan, here are a few particulars to assist in determining if it is worth pursuing.
- Co-borrow with a blood relative.
- Low down payment. (3 – 3.5% for single-family homes)
- Lower interest rate. (vs. an investment property loan)
- Rooms are rentable.
- Tax benefits can be shared. (Determined by how much each party is paying. Consult a tax advisor.)
- Both borrowers have title to the property.
- Social Security income can be considered.
- Makes home ownership possible for young adults or others who would not otherwise be able to afford to purchase a home.
- The property does not have to be a condo. Can be a single-family unit, townhome, or even multi-unit property.**
- The child or family member can assume the loan later on without refinancing.
- Helps borrower establish a credit rating.
- One borrower must occupy the residence.
- Both borrowers must qualify (have good credit*).
- **Multi-units can be purchased as long as the loan-to-value does not exceed 75% (i.e. You need a 25% down payment).
- The lowest credit score of the parties is used to determine eligibility and interest rate.
- Credit reports for a non-borrowing spouse will be used if the loan is originated in a community-property state.
- Whoever pays the bills gets the tax deduction.
INSUFFICIENT / NO CREDIT HISTORY
Considering a scenario of a young adult just out of high school or a special needs family member, many of you may think, “I don’t have any credit history! How can I qualify?”. In the case of no credit history, the underwriters will look at non-traditional credit. For example, has the individual regularly paid his rent on time without any reported delinquency? They will also look to at payments being made on time on things such as cars, cell phones, or other regular bills. An individual may not have more than (1) 30-day delinquency on payment to other creditors; and no collections reports within the previous 12-months.
*For those with a ding in their credit history, underwriters are going to look for the following:
- No delinquency on insurance, utility, cell phone, tv, etc. payments.
- 31% payment-to-income ratio
- 43% total debt-to-income ratio
Also, be aware that for a Kiddie Condo loan, the primary borrower (the one needing a co-borrower) should have 2-month’s in cash reserves from their personal funds. No cash gifts will qualify. Again, speak to your lender for details.
SORT OF AN INVESTMENT, BUT NOT REALLY
The beauty of a Kiddie Condo loan is that you can use it to create a stream of income, offsetting the cost of your mortgage and even potentially generating passive income – all while technically not being an investment property. Keep in mind that the property must have one of the borrowers using it as their primary residence at all times. However, if you purchase a home with a basement, several large rooms, or an attic space, you can create additional living spaces to be rented out. If you have the funds to pay for a 25% down payment, a Duplex or other multi-unit property can turn into excellent cash flow as long as one of the borrowers is occupying one of the units.
In addition to saving money on higher education expenses, you can also generate revenue for you and your family member. Interested in finding out if purchasing a Kiddie Condo is right for you? Give me a call at 719-321-0800 and let’s chat!