Kiddie Condos and Your College Bound Student
According to a many published articles discussing ever increasing cost for college bound students the cost for room and board is exploding. Unfortunately, when your child graduates, there’s little to show for those housing dollars. FHA’s “Kiddie Condo” program may allow you to get something back for your money and create a great tax deduction.
Don’t let the name “Kiddie Condo” fool you. You don’t have to limit your purchase to just a condominium with the Kiddie Condo Program. FHA allows for any one to four family properties to be included in the program. With just 3.5% for the down payment FHA allows parents and their college bound child the opportunity to purchase a home while attending college anywhere in the country. Although multi-family homes [duplexes, triplexes or a four unit property] can be included in the program, FHA limits the maximum amount financed to 75 percent on these properties.
FHA ordinarily limits mortgage loan amount to 75% of a home’s sale price or appraised value where the co-signor isn’t occupying the property. However, maximum financing of 96.5% is available for parents and college bound students.
The FHA doesn’t limit the program to just your child. If a family relationship can be established between you and the college bound students, which can include relationship by blood, marriage, or law (spouses, parents, children, siblings, step-children, aunts and uncles, nieces and nephews, etc.), as well as unrelated people who can document a longstanding and substantial relationship you may qualify for the program. Of course, all parties must sign the note and be bound by the terms of the loan, but lenders that offer the program don’t require your college bound student to be employed or have to income qualify. However, they shouldn’t have any derogatory credit and any monthly payments they owe will be included for qualifying purposes, with the exception of allowable deferred student loans.
Some lenders may require your college bound child to have a credit rating or might accept alternative credit qualifying, which means they should have at least 12 months of credit history. Plan early by co-signing with them for a few credit cards and set them up with a cell phone in their own name and have them pay their auto insurance from their own personal checking account to begin establishing a good credit rating. The key is to show a history of good payments from them for at least three traditional or nontraditional credit providers.
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 report 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 bound child, be certain that he or she is responsible enough to pay bills on time, maintain the property and collect any rental payments he might be collecting for fellow students. Also, be reasonably sure that he or she isn’t going to quit or change schools anytime soon.
If your college bound student takes in student renters to help with their costs, you become a landlord and having a rental agreement in place is probably a good idea. If a student/roommate isn’t responsible with their payment, get in touch with their parent. 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’re covered in case of a lawsuit. Talk to your insurance agent about adding an umbrella liability policy. It boosts your coverage to $1 million and is a fairly inexpensive way to buy peace of mind.
Regardless of how the home purchase is financed, there is one other major issue to consider – whose name goes on the deed. Having the property in your children’s names could allow you to escape capital gains tax consequences that a second home would be subjected to, should the property rise in value and you could benefit with local property tax homestead exemptions as well.
You might be able to write off mortgage interest and property taxes on your kiddie condo, 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.
Whatever route you choose to meet your financial and tax implications, most attorneys recommend parents buying a kiddie condo for their children, place the property in a trust. Be sure to get both good legal and tax advice before pursuing a kiddie condo purchase.
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