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What’s a Kiddie Condo Loan?

Written by Posted On Wednesday, 28 July 2021 00:00

It’s that time of year when kids are graduating from college. They’re certainly due their congratulations. I, for example, just attended my third child’s graduation ceremony in Colorado. Since that was my last child to graduate, I essentially got a big raise. But for those parents whose child is getting ready to go to college this next fall, one of the main considerations is where to live. 

Many colleges and universities require a freshman to live in campus housing while others do not. Some students may be entering their second or third year of school and looking for a new place to live. Most students pay rent as many don’t plan to live in the same city where their school is located. A place to live is short term. And, as with other rentals, it’s a temporary expense. But there is another option in buying a place to live.

Buying a place to live is typically out of the foray of a college student, so most often a purchase comes in the form of relatives helping out by buying a property outright. Usually, this purchase is initiated by a parent or grandparent. When buying a rental property, the choices are either a government loan or a conventional one. 

Conventional loans, those underwritten to Fannie or Freddie standards, will require a down payment of at least 20% of the sales price and buyers can get slightly better terms with a 25% down payment. Still, rates and terms for rental properties are higher compared to those for a primary residence. A primary is a property where the owner lives there. However, the minimum down payment requirement forces the choice of renting vs. buying. But not with a ‘kiddie condo’ transaction.

A kiddie condo loan program is somewhat of a misnomer because the property doesn’t have to be a condominium unit. The property can be any type of residential property. Under this type of financing there are some major advantages for relatives who put their name on the dotted line to buy the home for the student. What sort of advantages?

Probably the biggest is the amount of down payment required for a kiddie condo loan. Recall that government-backed loans must be owner-occupied. When using a government-backed FHA loan, the student as well as the relatives are all on the note but only the student lives in the property. This situation means lower down payment and lower rates and fees, even though there are some non-occupied borrowers on the note. A positive credit history will also boost credit scores for everyone on the note. This is especially important for students with limited credit histories.

Another advantage relates to income tax deductions. You’ll want to consult with your tax professional about this but in general, interest and discount points may be a tax deduction. And finally, there is equity growth. Owning a property for three or four years typically means the value of the home has increased, contributing to everyone’s wealth. And, even after the student graduates, the home can still be used as a rental property but with all the benefits of a primary residence. Graduating and moving out does not change the terms of the original note.

As this fall approaches, take a look at the advantages of a kiddie condo arrangement. Especially so if the parents are thinking about buying a property instead of throwing their money out with rental payments.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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