Student-landlord can play key role in financing
Foreclosures and short-sales still make up a significant portion of the housing market. In fact, in some areas, distressed properties make up more than one-third of all recorded sales.
What if you were to find one in the college town where your child plans to spend the next several years of her life? What if you turned a dilapidated, community eyesore into a college rental that could serve as an alternative to dormitory living for your kid, then as a long-term housing resource for faculty and staff once she has moved on?
In a recent column, we discussed how the first question regarding a college rental is the maturity of the child/student living in and managing the property. Could she handle the responsibility and choose roommates who would not continually party and upset the neighbors? There’s a reason why local residents do not live near fraternity row and they are not happy when other homes with fraternity-like hours and behaviors suddenly pop up on their once-sleepy block.
However, let’s assume for a moment that all the stars are aligned — your kid really has her head on straight and you found a fixer-upper on a safe block where she could walk or bike to campus. With low interest rates and attractive loan programs, it might make sense to do the research and see what’s possible.
Loans insured by the Federal Housing Administration (FHA) (sponsored by the U.S. Department of Housing and Urban Development) permit expanded guidelines, such as loan-to-value ratios. More importantly, FHA allows for children to remain on the title as owner-occupants, even though the parents supply the down payment and are the actual purchasers.
One of the creative programs is the FHA 203K, which was designed to roll all financing into one package. The borrowers can take out one mortgage loan, at a long-term fixed or adjustable rate, to finance both the acquisition and the rehabilitation of the property. The mortgage amount is based on the “as will be” (projected) value of the property and takes into account the cost of the work.
“Remember the FHA 203K is a program that is limited to owner occupants,” said Mark Palmer, vice present of loan production for Seattle Mortgage. “With the children on title and living in the property, it will work.”
Let’s say a run-down house near a university is priced at $80,000 and needs $20,000 in repairs. The parents, as nonowner occupants, would probably have to pay 15 percent down, or $15,000. An appraiser estimates that the house will be worth $130,000 after the work is done.
Enter the child as co-owner and landlord. The bank says based on the $130,000 appraisal, it will lend $123,750 to a qualified buyer. The kid and parents qualify for the FHA 203K because the child is viewed as an owner-occupant.
“The child-landlord could obtain the down payment from all gift funds from the parents,” Palmer said. “The down payment required would be 3.5 percent of total acquisition cost —base purchase price plus the rehab funds.”
Another piece that goes into funding the 203K transaction is a 10 percent holdback on the amount of the rehab funds. So, $20,000 in repairs means $2,000 would be held back. According to Palmer, if all the work stays on budget and schedule (both of those elements are very important), the money will come back to the buyer after the last draw is taken and the release of mechanics liens is obtained.
So, in some-fixer-upper situations, student co-owners can play a key role in securing creative financing.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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