Kiddie Condos, Not Just For Kiddies or Condos!
There is a term, “kiddie-condo” we use and hear in the real estate business a lot. In it’s original sense, a kiddie-condo loan was aimed at a parent (who won’t be residing in the property) co-borrowing with a child to purchase a condo/home for the child to reside in while they go to college or grad-school. As you will see in this post, the term “kiddie-condo” is much too limiting.
We would be better off to call these loans “non-occupant-co-borrower” loans in that a parent can co-borrower with a child, a child can co-borrower with a parent, a brother can co-borrower with a sister, and so on. We run into a lot of questions about this type of loan, we run into clients being told that only FHA can accommodate this set up, and, as well, run into clients being told that it can’t be done at all. Hopefully we can bring some clarity.
We call a person who is on the loan to help someone qualify but won’t be living in the property, a non-occupant co-borrower. Co-signer can be an interchangeable term. FHA is the lowest down payment option for a non-occupant co-borrower. As we know, FHA requires 3.5% down and has good interest rates. However, FHA has become more and more expensive over the years to the point that it isn’t often our first loan choice for people (this is another blog topic in and of itself). So we look to a conventional (non-FHA) loan.
Freddie Mac, unlike Fannie Mae, allows for a borrower and a non-occupant co-borrower’s incomes to be blended to create one debt-to-income ratio. This means monthly liabilities are also being blended, but assuming the co-borrower is financially sound, a Freddie loan is a great way to go. Another advantage to going the conventional loan route is we don’t have to worry about FHA condo approval if the subject property is a condominium. And, these loans DO NOT have to be on condos, they can be on a $280,000 singe family, for example. There are some restrictions to this, but generally this type of loan can be done at a 5% down payment.
So, a kiddie-condo loan is simply a loan where we have a non-occupant co-borrower helping an occupying borrower to qualify.
There are quite a few reasons we look at this such as:
Occupying borrower is a student and has no income
Occupying borrower just became self-employed and so their income isn’t useable for underwriting purposes
Occupying borrower doesn’t have a high-enough income to qualify for the intended purchase
Occupying borrower has too much debt to handle their new housing payment in addition to the debts they are already paying on
Occupying borrower is between jobs
Occupying borrower is retired, on a fixed income, which isn’t high enough to qualify
This is not a comprehensive list, rather, just examples of when a non-occupant co-borrower might come into play.
A non-occupant co-borrower is not used to overcome credit issues for the occupying borrower. The lender is going to use the lowest middle FICO score of any borrower on the loan so a non-occupant co-borrower with a 780 FICO isn’t going to make up for an occupying borrower with a 580 score. If the occupying borrower’s score won’t work for a mortgage then an alternative loan is sought, such as having the non-occupant co-borrower possibly purchase the property on their own.
There are requirements to meet to be an eligible non-occupant co-borrower. For sake of ease, it is best to say a blood relative or someone related by law such as a fiancé.
At the Jeff LaRue Team, we will always have a frank discussion of the ramifications for the non-occupant co-borrower, such as possibly having an impact on their future borrowing power, but this type of loan is a critical arrow in our quiver of home-buying options. Many transactions that may not have happened have been made possible with this setup. As always, please don’t hesitate to ask with any questions you may have!