Question: My husband and I are considering purchasing a condo near our son's college. The lender we spoke with offered us only the higher, investment property rate. She gave us three reasons:

• First, our son doesn't have enough credit to be on the title with his parents as co-signers.

• Second, she said that the property needs to be in a resort area to be considered a second home.

• If the campus was located at the beach, she says, we would qualify for the better rate. Third, the campus is not far enough away which means the property we want to buy is too close to our primary residence to be considered a second home.

We have no intention of renting the property out. We simply wish to hold the property for four years while my son attends college. It seems to be a better alternative to paying rent. I don't see why this situation doesn't qualify for the better interest rate. Any comments or help is appreciated.

Answer: I think your lender is wrong and I think somebody has things mixed up. Let's review these three reasons.

If you choose to buy a property for investment, as a second home, or a primary resident, you have every right to put your son on the title as a co-owner. He does not need to be obligated on the loan, but you may surely put his name, along with yours, as an owner of the property.

Your lender was probably referring to an arrangement where your son would take title and apply for the mortgage as a primary occupant, with you and your husband applying as non-occupant co-borrowers.

Such an arrangement would certainly remove any doubt that the property is purchased as a primary residence. However, the lender could very well be correct if your son wouldn't be able to qualify for a mortgage if he has little credit and income. Non-occupant co-signers can loosen underwriting guidelines, but most lenders want to see that the primary borrower has some ability to repay the loan on his own.

Let's look at the second and third reasons. Your lender is applying what I think are outdated guidelines to differentiate an investment home and a second home. Years ago, most lenders used a set of criteria to make such a determination. Indeed, in order for a house to be considered a second home it had to be at least 50 miles from the primary residence and located in an area that's typically visited for vacations and holidays.

Thanks to the ever-evolving mortgage industry, most lenders take more of a common sense approach to the issue. In my experience, a borrower simply needs to make a written statement of the intended use of the property. A reasonable underwriter should examine the file and see if the intent makes sense.

Your situation should certainly pass the test. A property purchased for the use of a family member near college seems to me as perfectly reasonable.

What might be considered unreasonable? I was approached one time by a borrower who was buying his neighbor's house across the street. He applied for the lower rate that is allowed for second homes. When I asked him on what basis he considers the purchase to be a second home rather than a rental property, he told me that he will be moving into the house and his wife will be remaining in their current residence.

That one didn't pass muster. My advice for you would be to draft a letter that explains your intent and put your son on the title with you. If your lender still won't give you the better rate, ask some trusted sources for a recommendation for another lender or mortgage broker. I'm sure you'll find plenty that would be happy to make you a loan.

Published: August 8, 2005

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