Can you use income from a boarder to qualify for a mortgage?
If you rent out a room in your home, you may be wondering if you can use that income to get approved for a mortgage. For standard loan programs, you usually cannot include boarder income in your loan application; however, there are a small number of exceptions to this guideline. Continue reading to understand the cases when you can use boarder income for a mortgage.
If you are disabled and receive monthly rent from a nurse or personal care professional who lives with you, these payments are counted as income when you apply for a mortgage. The boarder income is added to any other income you receive, up to a limit.
The rent payments can only comprise a maximum of 30% of the income used to qualify for the loan. This means you are required to have other income sources or you may not get full credit for the boarder income.
For example, if you receive $2,500 in other monthly income, the maximum amount of boarder income you can use for the mortgage is approximately $1,100 per month. In this case, the rental income is 30% of your total monthly income of $3,600. If your other monthly income is lower, the amount of boarder income included in your application is also lower even if the actual rent payments you receive are higher.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford including boarder income
You are also required to document the income and confirm that the person making the payments lives in your home. You can provide bank statements, cancelled checks or similar documents that show the receipt of the rent payments for the past twelve months. Additionally, you can use tax documents, a government-issued ID, financial statements or even bills to verify that the boarder lives with you.
If you do not fall into the category outlined above -- being disabled with a personal care professional who lives with you -- there are three specific mortgage programs that permit the use of boarder income to qualify for the loan: the HomeReady, Home Possible and FHA programs.
The HomeReady and Home Possible programs are similar low down payment mortgage options that enable you to buy a home with only 3% down. These programs also allow you to include boarder payments in your application, which may enable you to afford a higher loan amount.
Review our HomeReady Mortgage Guide
To use the boarder income for either of these programs you are required to document -- using the methods outlined above -- that you have lived with the person making the payments for at least the past twelve months and that you have received at least nine monthly rent payments over the past year. This means if you want to buy a home and rent out one of the rooms, you cannot use that future income to qualify for the mortgage unless you have received payments from the boarder in the past.
Additionally, you must show that you have personally received the payments from the boarder. If they previously paid rent directly to a landlord then those payments cannot be included in your application. Finally, the person paying rent cannot be a borrower on the mortgage or own the property being financed.
Review our Home Possible Mortgage Guide
The FHA mortgage program also allows you to use boarder income to qualify for a mortgage. For an FHA loan you need to show a two year history of receiving boarder income according to your tax returns. You also need to demonstrate that you are currently receiving the income by providing cancelled checks or bank statements.
You are also required to provide a written document such as a lease or rental agreement that verifies that the rental income is expected to continue. Lenders use the lower of the two year average income or the income according to a current lease agreement to calculate the boarder income for an FHA mortgage.
Review our FHA Mortgage Guide
We should highlight that both the HomeReady and Home Possible programs apply borrower income limits and all three programs use loan limits, which means not all applicants are eligible. You also need to qualify based on your credit score, debt-to-income ratio and employment history. These programs, however, offer a significant advantage for borrowers that meet these requirements and receive boarder income.
The HomeReady, Home Possible and FHA programs are offered by traditional lenders. We recommend that you contact multiple lenders in the table below to learn more about their qualification guidelines and to compare loan terms. It is important to understand if you can use boarder income before you apply so you know the loan amount you are eligible for. Plus, shopping lenders is the best way to save money on your mortgage.
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Sources
"B3-3.1-09, Other Sources of Income, Boarder Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
"B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, July 3 2019. Web.
"Home Possible Product Requirements." Origination & Underwriting. Freddie Mac, 2019. Web.
"II.A.4.c.xii.(I)(4), Boarders of the Subject Property (TOTAL)." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, April 19 2021. Web.
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