The Right Mortgage For Single Occupants With A Roommate


Mortgage Profile: Single With A Roommate

Robert is a 19-year-old English major at a four-year liberal arts university. While he spent a semester in the dorms, he now wants to experience off-campus life. Unfortunately, rent in his little college town is expensive. The only apartment he can afford on his own is a tiny studio, and even then, he will need to survive on Ramen noodles and tap water. He calls his parents for help. Robert’s dad happens to know a realtor in the area, so he asks her for some insight. She explains the concept of the “kiddie condo,” a single-family condo or townhouse where their son could live, while renting an additional room to another student or young professional. In many cases, she explains, the revenue from rent covers most, if not all, of the mortgage. She knows of several such properties available for immediate purchase. Robert’s parents fly out to take a look. Together, they settle on a two-bedroom, two-bath condo a few miles from the university. Their offer of $120,000 is accepted. The realtor assures them that they can easily rent the second room for $700 a month. Now the family just needs to evaluate their mortgage options.

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Investment Property Loan

In addition to a full-time course load, Robert works part-time at a local coffee shop. He cannot afford to rent an apartment on his part-time income, let alone qualify for a mortgage to purchase the condo. This means that his parents will have to buy it with a non-owner occupant loan, also known as an investment property mortgage. In order to secure financing, they’ll have to contribute a down payment of 20 percent, equal to $24,000,along with the typical closing costs and fees. Because interest rates on rental properties tend to be higher, their lender offers them a 30-year fixed-rate loan of 7 percent on the remaining $96,000.

Kiddie Condo Loan

However, the family has a second option. They can secure a “Kiddie Condo” mortgage through the Federal Housing Administration (FHA). There is one catch with this mortgage, though: one note holder must live on the property. In this case, Robert will live there while attending college. The Kiddie Condo loan requires a mere 3.5 percent down payment, plus closing costs and fees, and features interest rates that are typically lower than those found on investment property products. The note will list Robert and his dad as co-borrowers, and the underwriter will use both of their incomes in the qualification process. Their lender offers them a 30-year fixed-rate mortgage at 5 percent on the remaining $115,800, after the down payment of $4,200.

SEE ALSO: FHA Kiddie Condos: College Housing And Investment

A Look At The Numbers

If Robert’s parents choose to purchase the condo for him using an investment property loan, the monthly payment of principal and interest will be $638.69. If they are able to rent the second room for the $700 estimated by the realtor, they come out ahead $61.31 each month. That’s enough to cover Robert’s basic cable package. If they decide to utilize an FHA kiddie condo loan to buy the property together, the monthly payment of principal and interest will be $621.64. Assuming a second room rental of $700, they’ll make a profit of $78.36, and Robert can add a premium channel to his cable package – or splurge on some Hamburger Helper to replace that Ramen. Regardless of the mortgage that Robert and his parents choose, they will clearly benefit from taking time to evaluate their purchase options.

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