By: Stephanie Diana Gast- Wilson
Many parents when they send their kids off to college might co sign on a new car to help their children save money in college. Or co sign on an apartment near campus since it is cheaper then living on campus and many students don’t yet have the credit history to rent. Although some parents instead opt to help their child to buy a condo which may or may not be in a project/ condo type known as a “Kiddie condo”. (Not to be confused with Kitty Condos which are a type of cat tree/ cat bed.)
So, the defining characteristics of a “Kiddie Condo” aside from the student being the home owner, primary occupant on the home loan these type of loans allow for the unit owner to help pay for the costs by renting out the additional units. I am sure there are still projects in college towns that may still operate where these sort of functions are allowed. However, many CC&R’s/ Condo Declarations (which are the legal documents that state the rules and guidelines the HOA and the owner have to follow)often do not allow for the renting of less then the whole unit or not at all. Also as defined on FHAinfo.com the issues with these types of condos along with the pros.
With a Kiddie Condo loan program, at least one borrower must occupy the property as his/her primary residence, but extra bedrooms could be rented out to help cover the cost of the mortgage payments. This is a perfect way for a college student, recent graduate, or anyone unable to obtain a loan on his/her own to buy a condo or townhome or single family home with the help of a family member. The tax benefits, such as deducting mortgage interest and real estate taxes on a Federal Income Tax return, can be divided among the owners, according to who pays the expense. See your tax advisor for details.
Make sure you read the section on credit as both borrowers must qualify. If the owner occupant has little or no credit you should review the “non traditional credit” section and pay particular attention to the information on the 2nd page.
Note that the property DOES NOT have to be a Condo. If it is a condo then you need to make sure that the project is approved or the that the property can get a “Spot approval”. Please see the Condo section for more information. (http://www.fhainfo.com/kiddiecondos.htm)
Now the reason that many CC&R’s/ Condo Declarations tend to have the clause written preventing the renting of less then the whole unit is to prevent “transient” property types. Which FNMA finds any type of transient (limited stay or limited accessibility of the unit [such as just renting a room]) as a potential condotel indicator. Condotel’s are a horse of a different color and we will talk about those in another post. For now just know that FNMA doesn’t like condotels and finds them unwarrantable for financing. Also know that FNMA isn’t the only one who hates them they are unwarrantable to Freddie, VA, or FHA loan products as well. Forbes.com goes further to talk about the potential financial pit falls that “Kiddie Condos” can reek on one’s taxes. http://www.forbes.com/sites/peterjreilly/2014/07/23/use-of-condo-by-son-blows-1031-exchange-for-state-tax-purposes/
That being said, this makes any condo review start to sink on what feels like shaky ground. What is an Underwriter or Condo Review Specialist to do? Although most Condo Review Specialists know when in doubt ask FNMA. When asked; FNMA replied with the following via email. “We do not have a review type for. ‘Kiddie Condos’. The project must meet our requirements as either an Established or New project. You need to determine if you want to do a Lender Full Review, CPM or if your loan qualifies for a Limited.” So, if dealing with a project that is marketed as a “Kiddie Condo” as opposed to a borrower just trying to help their kids buy a detailed investigation should be done on the HOA to make sure it fits FNMA’s guidelines.
Now there is a new trend to “Kiddie Condos” and it has nothing to do with kids buying their first home. It has to do with mom and dad buying a second home/ vacation home. The New York Times has an article noting the trend of parents buying condos in the towns their kids are going to college so they can watch their games and spend holidays together. http://www.nytimes.com/2008/08/22/greathomesanddestinations/22college.html?pagewanted=all&_r=1& . Personally I find the quotes within this article to really make me laugh as a retired high school and college athlete. “…’Just what every kid wants — their parent moves in, right?’, said M. J. Berrien, who, with her husband, the president and publisher of the Forbes Magazine Group, keeps a main residence in Westport, Conn. ‘But we’ve always been very active in her sports life and we wanted to be there for her games. That was the whole idea’(NY Times)”. However, the article goes on to explain that for families where doing this not only saves them the stress of finding a hotel and it helps their family bond and have some normalcy when children are going through the emotionally tumultuous time of college.
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Use Of Condo By Son Blows 1031 Exchange For State Tax Purposes. (n.d.). Retrieved March 19, 2015, from http://www.forbes.com/sites/peterjreilly/2014/07/23/use-of-condo-by-son-blows-1031-exchange-for-state-tax-purposes/
Tutelian, L. (2008, August 21). Following the Kids to College. Retrieved March 19, 2015, from http://www.nytimes.com/2008/08/22/greathomesanddestinations/22college.html?pagewanted=all&_r=0