— -- Q U E S T I O N: I would like information on the Kiddie Condo Loan. How does it work and how does one file taxes for both child and parent?
A N S W E R: With mortgage rates near historical lows, a growing number of college students and young adults are becoming homeowners with the help of their families and the "Kiddie" Condo Loan program. Offered by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD), a Kiddie Condo Loan is a mortgage product that enables an individual to co-borrow with a relative, such as a parent or grandparent, who will use their income and/or assets to help the new borrower qualify for the loan. The new borrower and relative are viewed as co-borrowers and both take the title to the property and are responsible for the loan.
To qualify for this type of mortgage, one of the co-borrowers is required to make the property their primary residence, but they have the flexibility to rent additional rooms to help cover the mortgage payments. With a Kiddie Condo Loan, the tax benefits of homeownership, including deducting mortgage interest and real estate taxes, can be divided between the owners according to how they split the expenses. Lastly, despite the name "Kiddie," there is no age restriction with this type of loan, nor does one of the borrowers need to be a student.
Additionally, Kiddie Condo Loans offer three primary benefits to would-be borrowers. First, the required down payment is low (3 percent of the purchase price). Second, because at least one of the co-borrowers must live in the home full time, the property is viewed as owner-occupied and interest rates on owner-occupied mortgages tend to be lower than those for investment properties. Finally, by being a co-borrower, the new borrower is able to establish a credit rating.
Although many parents believe buying property with their college-age children is a solid investment, it is important to carefully evaluate the strength of the housing market in the area of interest, the ongoing costs of upkeep and insurance, and perhaps most importantly, whether your child is ready for the responsibility of homeownership.
E-mail Mellody with your personal finance questions.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributedto this report.