The FHA Kiddie Condo Loan Program

The FHA “Kiddie Condo” program is really just a regular FHA loan! Here’s what a Department of Housing and Urban Development spokesman in Washington had to say about it:

“HUD does not have an FHA “Kiddie Condo” program per se. Nevertheless, as the text from our mortgage credit handbook will attest, parents may indeed buy a house near campus with their college-aged children hence the nick name FHA Kiddie Condo. The child doesn’t have to have a job but must sign the mortgage and the note and, of course, occupy the property at least during the school year.”

HUD’s rules say that two or more people can get an agency-backed loan even if one or more of them will not be living in it as long as all the borrowers are “related by blood, marriage or law (spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews, etc.).” Even if the borrowers are not related by blood, they can still qualify for it as long as they “can document evidence of a family-type, longstanding, and substantial relationship not arising out of the loan transaction.“

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 (see above) 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).
2. A lower, owner-occupied FHA interest rate on the mortgage vs the higher investment property or second home interest rate.
3. Helps the new borrower establish a solid credit rating.

With an FHA 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.

Finally, be aware that this kind of loan may create all sorts of tax issues. You are entitled to deduct the mortgage interest from two homes. If you do own more than two, however, you can choose which two to deduct the interest on.

Will anyone other than your son be living there? If they are, will they be paying rent? To whom? Do you have to report that rent as income? Who reports it? You or your son? Could problems develop if it is not reported? Can you rent it out when school is out for the summer? If you do, does it become “rental property” at that point? Who collects and reports that money?

These are all questions you need to discuss with your tax preparer.