Thanks in large part to sky-high NYC rents (for starter apartments and dorms alike), more parents are opting to buy apartments for their grown children rather than just help with the rent. Brittney Baldwin, a vice president and mortgage loan officer at National Cooperative Bank in Manhattan, says she's done two of these deals in the last month alone, one for a condo on the Upper East Side and for a Brooklyn co-op. So what do you need to know about getting a mortgage in a case like this?
Basically, there are two ways to go about it, says Baldwin:
Option 1: Buy the apartment as an investment property
In this case, you (the parent) are the only borrower and the mortgage won't have your child's name on it. That also means that your offspring's financials aren't considered in order to be qualified, and they won't be taking on any debt, or be responsible for the payments. Most parents do it this way, says NCB's Baldwin, either because the child doesn't have any credit established yet (which they need in order to borrow), or because they don't want their child to take on the debt.
The downside is that many co-op boards don't allow investment properties, so buying an apartment as an investment could limit your choice of apartments. However, even co-op boards that frown on investment properties may make an exception if you explain you are buying for your child and that he or she will live in the apartment as long as you own it. As long as the board knows you're not planning to rent it out — and create a revolving door of tenants renting from you — they may actually be okay with it. Many apartment listings in parent-friendly buildings will note that parents can buy for children in the property description.
Keep in mind that your mortgage bank will likely require a slightly bigger down payment of around 25% for an investment property than for a primary home. Also, your interest rate will likely be somewhat higher. The amount varies based on the lender, says Baldwin, but NCB charges a half a percent higher, says Baldwin.
One more thing to keep in mind: Since Fannie Mae doesn't allow for parents to buy for kids unless a child is disabled, you'd have to opt for a portfolio loan rather than a conventional loan. Portfolio loans are held in-house by a lender and not sold on the secondary market, so they're not subject to Fannie Mae and Freddie Mac guidelines, but often have slightly higher interest rates.
Option 2: Get a non-owner-occupied co-borrower loan
With a non-owner-occupied co-borrower loan, your child's name is on the loan, which means the bank will be looking at your progeny's debt-to-income ratio, too (usually requiring 43 percent or less). "As long as the child has an income, and can prove it on pay stubs, we can count that income," says Baldwin.
NCB, for one, offers a blended ratio, meaning that parents must be able to support their own debt and their kid's debt.
While your child doesn't have to have a job in order to be a co-borrower, he or she does need to have credit.
For a co-borrower loan, NCB will allow a 20 percent down payment — about the same, maybe slightly higher than regular, primary home — and does not charge a higher interest rate.
Some borrowers object to doing it this way because it means their child is financially obligated to pay back the loan if they don't, and it could affect their credit if they default on payments.
On the other hand, says Baldwin, it will also help them build credit — good credit -- as long as mortgage payments are made on time.
One further nuance to be aware of: When there's a primary borrower and a secondary borrower, typically only the primary borrower can deduct their interest payments and their property taxes from their taxes come April 15.
So which option should you pick?
A mortgage loan officer can tell you which is the best way to go, says Baldwin, advising what's best for your experience.
And if you have a particular apartment in mind, ask for the building's input. "I typically tell parents that if they've found a property, to reach out to the building management and see what they say about the type of loan they prefer," says Baldwin.
Brittney Baldwin (646-201-4714) and Robbie Gendels (646-201-4713) are mortgage loan officers at National Cooperative Bank in Manhattan.
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