A great way for young adults to get started buying their first home is by using the FHA “Kiddie Condo” Loan Program. This type of mortgage allows a person to co-borrow with a blood relative (eg. parent, grandparent, sibling, etc.) who helps qualify for the loan using their income or assets. Both borrowers take title to the property and sign for the loan.
There are three big advantages to using this type of loan.
1. A low down payment (as little as 3.5% of the purchase price compared to the typical 20% investment rate).
2. A lower, owner-occupied interest rate on the mortgage vs the higher investment property interest rate.
3. Helps the new borrower establish a solid credit rating.
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 their first property with the help of a family member. I’d like to point out that this doesn’t have to be a condo; it can be a townhouse or single family home .
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.
If the owner occupant has little or no credit there still may be options. The Federal Housing Administration (FHA) has long permitted mortgage lenders to establish a borrower’s credit history through nontraditional means, including the compilation of performance on rental payments; utility bills; telephone and cellular phone services; cable television service; payments to local stores, etc. Make sure to speak to a lender about the details