FHA's "Kiddie Condo" Program for Student Housing
According to Trends in College Pricing, published by the College Board, room and board at colleges comes close to $1,000 a month, and when your child graduates, there is unfortunately little to show for all those housing dollars you spent. FHA's "Kiddie Condo" program may allow you to get something for your money, create a tax deduction, and get your child into an actual home.
FHA Loans for "Kiddie Condos" Doesn't Mean You Must Buy a Condominium
You don't have to buy a condo, but to get an FHA mortgage with just 3.5% down, you have to buy a single-family property. If you buy a duplex, triplex, or fourplex, FHA will only finance up to 75% of the property's value.
FHA Doesn't Require the Occupying Borrower to Be Your "Kiddie"
FHA loans ordinarily allow loans of up to 75% of a home's value where co-borrowers won't occupy the property. However, maximum financing of 96.5% is available for borrowers related by blood, marriage, or law (spouses, parents, children, siblings, stepchildren, aunts and uncles, nieces and nephews, etc.), as well as unrelated people who can document evidence of a "family-type, longstanding, and substantial" relationship. Of course, all borrowers must sign the note and be bound by the terms of the loan.
All Borrowers Have to Qualify
Everyone on the note has to meet FHA's credit underwriting standards, even those who aren't actually making the payments. If your child has little or no credit history, you can add him or her as an "authorized user" to your credit accounts. This gives kids a credit history, and you don't have to let them actually use your credit cards. In addition, FHA mortgage underwriting requires that lenders consider non-traditional credit. So, if your child has a history of paying a cell phone bill, car insurance payments, or another regular expense, that can be used for evaluating creditworthiness.
Managing the Home Loan Payment -- and Your Student
Keep in mind that if you are expecting your child to make the FHA mortgage payments, and he or she pays late, it shows up on your credit and affects your credit score. One solution is to make the mortgage payment yourself and have the child pay you each month. That way you know that the mortgage is being paid as agreed. It goes without saying that before opting to buy a home for your student, be certain that he or she is responsible enough to pay bills on time, maintain the property, and collect any rents due. Also, be reasonably sure that he or she isn't going to want to drop out or change schools.
If your student takes in roommates to help with costs, you become a landlord. Having any roommate sign an agreement is probably a good idea, and if the student isn't responsible for the rent, getting in touch with his or her parents is something you'll want to do, too. Also, don't forget that as a landlord, you take on the liability issues that are involved with a rental. If someone gets hurt on the property, you might be sued. Obtain sufficient liability insurance so you don't get wiped clean in a lawsuit. Talk to your insurance agent about adding a so-called "umbrella liability" policy. It boosts your coverage to $1 million, and is a fairly inexpensive way to buy major peace of mind. Don't forget to factor in the extra premiums when you're calculating costs.
FHA Mortgage Interest: Taxation Complication
You may be able to write off the mortgage interest and property taxes on the student's property, just as you do on your primary home. Normally the deduction is pro-rated between the parties who actually pay the interest. But if you are a high-income family, you may get less of a tax break. If you collect rental income you should be able to deduct part of the utilities, insurance, and maintenance, as well as depreciation on the property. Meet with a tax professional to get a handle on the specific numbers and considerations for your situation.
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