There are many reasons you might consider buying a second home for your child to live in. Maybe they’re in college and off-campus housing is hard to come by, or maybe you just want an investment property in an area where your child works or lives.
Whatever the reason, there are advantages to purchasing a second home for your child to live in. It’s important to note that unless your child is disabled or handicapped, the home cannot be purchased as a primary residence – it must be a second or home or investment property.
Buying a second home means a second property to take care of — and usually, a second mortgage, too. Before you pull the trigger, make sure you’re ready for what that entails — the costs, the requirements, and more. We’ll break it all down below.
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You can absolutely buy a house for your child to live in, and there are several reasons you might do so.
For one, you might consider it if your child is in college. Often, rents in college towns can be very expensive — especially when tallied up over many semesters. In some cases, buying a home for your child to live in and renting out several rooms can make better financial sense than paying for campus housing. It may even net you income in the long run if you continue to rent out the home after your child graduates and moves out.
Some other reasons you might consider buying a home for your children to live in include:
- You want a long-term investment property. Real estate can make for a great investment. If your child lives in an in-demand market, buying a home for them to live in can be a great way to both give them housing and build up your own investment portfolio. Even if they move out, you can rent it to someone else for extra income or sell it for a profit, assuming its value has increased
- You want the tax benefits. You may qualify for valuable tax deductions with a second home purchase, including deducting property taxes and interest paid on the mortgage. Just make sure you talk to your tax advisor before you buy. They can ensure you’re maximizing any potential deductions you might be eligible for
- You’d like to provide your child with long-term, stable housing. Don’t want your child bouncing from rental to rental or throwing money down the drain on a landlord’s mortgage? Buying a house for them to live in provides lifestyle stability, and it may give them a chance to develop money management and interpersonal skills if they decide to take on roommates
You may simply want to help your child out, too. Perhaps they lost their job or are having trouble finding other housing, or maybe they’re having a baby, and you’d like to lend your support from afar. All of these are valid reasons for buying a home for your child.
“Paying cash is usually the easiest way to proceed,” says Marc Van Steyn, a real estate agent with RE/MAX Premier Choice. “Competition is fierce for rental properties around universities, and most investors are paying cash.”
Although paying cash may be challenging, it can make you a more competitive buyer. And if you’re able to take this option, you won’t need to worry about managing another mortgage payment each month.
Consider taking out a home equity loan or line of credit on your primary residence to make up the difference between cash on hand and the purchase price.
With soaring home values, many families could have six figures available via a home equity loan – potentially enough to pay cash for that near-campus home.
Another way to buy a second home for your child to live in is to take out an investment property loan. You will need a higher down payment and credit score than you would for a primary residence, and you’ll pay a higher interest rate on the mortgage.
However, depending on the size of the property, you might allow your child to have roommates who pay rent, allowing you to earn money on the home while also controlling your child’s housing costs.
You may also be entitled to a number of tax deductions related to the property, including expenses for maintenance and upkeep. And once your child moves out of the home, you can take on new tenants to continue earning rental income.
Long-term, you can also use the home equity on the investment property to upgrade it (and potentially draw higher rent), purchase another investment property, or renovate your primary residence.
To qualify for an investment loan, you can expect to need:
- 15% down payment for a single-family property; 25% down payment for a multifamily property with up to four units
- A credit score of 620 or higher (some lenders set their minimum for investment loans at 640)
- Two to six months of cash reserves (enough to cover that many months of mortgage payments, which include taxes, homeowners insurance, and interest), as determined by an automated underwriting system
- The number of financed properties you have will impact the amount required
- Sufficient income to cover the payments on both your mortgages, as well other debts you have to your name
“Buying a home with your child that they will live in can help not only you, but your child [as well],” says Sandy Krestan, a senior loan officer with Fairway in Phoenix, Ariz.
If the child is on the loan and you make the mortgage payments on time, that payment history will positively impact their credit history and credit score. As the home appreciates in value, you and they will have access to equity that can be used to fund future degree programs, other property purchases, or other wealth-building goals.
As a co-borrower, you and your child will both be legally and financially responsible for the loan, even if you don’t plan to live in the home. If your child intends to make the house payments but can’t afford them for some reason, you will need to pick up the slack. Should the loan go into default, it will hurt your credit and theirs.
Family Opportunity Mortgage
For most parents, buying a second home for their child means taking out a mortgage for a second home as co-borrowers with their children or taking out an investment property loan. Either of these can be more challenging than taking out a mortgage on your primary residence, as both are riskier for lenders.
There is an exception for parents of adult children with a disability or handicap who is unable to work or provide sufficient income to qualify for a mortgage, though. If you qualify for a Fannie Mae conventional loan, you may be able to purchase a home at for your child with a disability or handicap as if it were a primary residence instead of a second home or investment property.
This type of loan used to be known as Family Opportunity Mortgage by Fannie Mae. The guidelines that allow this loan still exist, but Fannie Mae has since removed the name.
To qualify for a Family Opportunity Mortgage, you’ll need to meet the following borrower criteria:
- 620 or higher credit score
- Down payment of at least 5%
- Sufficient income for two monthly mortgage payments and the upkeep on two homes, as determined by Fannie Mae’s automated underwriting system
- A satisfactory debt-to-income ratio (DTI)*
- Proof of steady employment
It’s also worth noting that adult children can purchase a home for elderly parents who can’t qualify on their own using a Family Opportunity Mortgage. In this case as well, the purchase is classified as a primary residence, even if the child will not live there with their parents. This can make a significant difference to your down payment requirement and interest rate.
As with anything, there are both advantages and drawbacks to buying a second home for your child to live in. On the upside, you get a long-term investment you can build equity in, you help your child with housing, and you may have the opportunity to bring in additional rental income. There can also be tax advantages to buying a second home (though the exact ones depend on how you finance the property.)
“There are several advantages, but saving on the cost of housing is probably the largest,” says Van Steyn, who has seen many parents purchase homes around The Ohio State University. “Most of my clients’ children will take on roommates who pay a portion of the rent. This can be very lucrative when you have multiple tenants paying rent in a property.”
The drawbacks, of course, are the extra mortgage payment it will come with, the more challenging financing process, and the upkeep and maintenance the home will require. There are also other costs to think about, too, including closing costs and furniture and decor expenses.
And, let’s face it, most college students aren’t known for how well they upkeep a property, or even clean their room. Budget for extra carpet cleaning and perhaps even regular check-ups of systems in the home, like the furnace, A/C, plumbing, roof, and more.
Additionally, if you opt to keep the home after your child has moved out, you’ll have to find tenants and act as a landlord, or hire a property manager (an additional expense).
|Can be a long-term investment||You’ll owe two monthly mortgage payments|
|Allows you to build equity||Possibly higher down payment and interest rate|
|Offers potential for future rental income||Requires upkeep and maintenance|
|May come with tax advantages||Lots of upfront costs, including closing costs, furniture, decor, etc.|
Buying a second home for your child to live in FAQs
Yes, a family member can live in a second home you purchase, as long as they are co-borrowers on the mortgage loan with you, or you use an investment property loan to finance the home.
Yes, parents can buy homes for their children. Typically, it needs to be an investment property or second home, but if your child is handicapped or disabled and unable to work, you may be able to buy the home with the same rates and terms as a primary residence mortgage. These come with more favorable rates and terms than investment property mortgages.
There are a few options if you want to buy a home in your child’s name. First, you can both be co-borrowers on the mortgage loan. This is a good way to qualify for the most competitive terms. You can also purchase the home and then add your child to the deed later on. Another option is to co-sign the loan for your child and cover their down payment and closing costs as a gift.
In the end, the right decision depends on your goals, financial situation, and your child. Consider how long they’ll live in the home, and whether you’ll want to keep the property after they move out.
If they graduate in two years and move to another city, will you continue to rent the property? Or will you want to sell it? Because of the closing costs and fees associated with a home loan, it usually doesn’t make sense to buy a property if you plan to sell in less than three years.
But if your child plans to stay in the area and live in the home for the foreseeable future, or you intend to continue renting it for income once they move out, it may be the right move.
Either way, it’s best to consult with a lender to find out what your options are and what type of loan makes the most sense for your family.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.