How to Use Boarder and Renter Income for Loan Approval
Are you having trouble getting qualified for an affordable loan?
If you have a renter or roommate, you may be able to use their contributions towards approval. The process can be tricky, but with the right knowledge and a little guidance, using accessory unit, boarder, or co-borrower income could be the boost you need to get approved.
Using Rental, Boarder, and Co-Borrower Income for Loan Approval
If you are having trouble proving that your income is capable of sustaining a HomeReady loan, you may find that the program’s accessory unit and boarder income options give you the flexibility and convenience you need. Fannie Mae has recognized that today’s homebuyers have a diverse range of needs, and they are expanding access to loans for low- and moderate-income borrowers by allowing certain forms of income for qualification. Income from accessory units and boarders is now allowed when applying for a loan. As you might expect, proper documentation is required, but this could be the difference between rejection and acceptance.
To help you understand how you can use these income sources, let’s look at a few specific examples…
Accessory Unit Income
An accessory unit is a separate unit that is identified in the appraisal which has a kitchen and a bathroom. Income from these units can be used under the HomeReady program, but you’ll need to be prepared to meet specific conditions.
Say you and your spouse are looking to purchase a single-unit property that has an apartment, which built over the garage and separate from the main living area. This apartment is fully functional and allows for completely independent living. You also have a potential tenant in place, and this tenant has already signed a lease agreement and will rent the apartment for a specific timeframe after the property is purchased.
In the lease, you have an agreement that the rent for the apartment will be $600 per month (for example). This rental income, even if it has not yet been paid, can be considered when you are qualifying for a loan. However, the amount that can be considered for qualifying purposes is not the full $600, but only 75%, which comes to $450.
According to Fannie Mae’s policy, the any rental income is multiplied by .75 to reach the qualifying number. (The qualifying income is 75% of the total.) They only allow 75%, and not the full rental amount, because there will inevitably be vacancies or loss. By only allowing for only 75%, they compensate for the likelihood that you will have a month or two when no rent money is coming in. (In our example, $600 x .75 = $450)
A boarder is someone who rents a room in your home or residence and does not have a separate unit with a kitchen, bath, or utilities. For boarder income, up to 30% of the qualifying income that you use for loan approval can come from the boarder. However, you must provide documentation for at least nine months of the most recent 12 months, which is averaged over 12 months. You must also have documentation of a shared residency for the past year.
Sound confusing? Here’s how it might play out…
Let’s say you are a single person looking to purchase a new home. You have had a roommate with shared living quarters for the past 12 months, and your roommate plans to live in the home you will purchase.
The roommate currently pay $450 for monthly rent. You have provided a document that confirms 12 months of shared residency, and also have cancelled checks that document the monthly payments from your roommate, which have come over 10 of the last 12 months.
This boarder income can be considered to help you qualify for a HomeReady loan, but you will have to multiply the monthly total ($450) by the amount of months your received the income (10), which would equal $4,500, which is then divided by a 12 (for total months in a year). The total monthly amount you can use towards your income would be $375. ($450 x 10 / 12 = $375)
These examples are typical scenarios, but every situation is different. For an accurate analysis of your situation, contact an experienced mortgage professional.
Home Possible, a program from Freddie Mac, also offers the chance to use income from a boarder to qualify. To qualify, the income must be on a one-unit property, which can include condos or PUD’s. Attached apartments, granny flats, or second units on the property are not allowed with the Home Possible program.
To qualify as income, you must verify that you and the boarder will continue to live in the property when you move to the new residence, and you must have resided with the boarder for at least 12 months. Again, the boarder income you use to qualify cannot exceed 30% of the total income used to qualify for the mortgage, and the rent will need to be averaged out over the past 12 months. You can use the same system for calculating that we used in the boarder example for HomePath. The boarder, however, may not be obligated to the mortgage note.
You will need to provide specific documentation that includes rents received over the past year and proof of shared residency, which could be a driver’s license, bill, or bank statement. If you are unable to provide the documents, you’ll have to qualify for the loan without the income from a boarder.
If you are having trouble qualifying, you could consider using a non-occupant co-borrower. This is a person who does not live in the house and may or may not have ownership status to the property, which is indicated in the title. Their income can be used to qualify, but they will need to sign the mortgage. The co-borrower cannot have an interest in the property sales transaction, such as the seller, builder, or real estate broker. This type of borrower, who is usually a friend or family member, can be used in Fannie Mae loans and other programs.
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