How to Use a Roommate’s Rent for Loan Qualification

Woman qualifying using roommate's rent checks.

If you rent a room to a tenant, you may be able to use their monthly rent checks as qualification for your next home loan. Assuming you can demonstrate that they have lived with you in the past and plan to live with you in the future, their payments could help you upgrade to a larger, nicer house!

Qualification Requirements for Using Rent Checks

Rent Checks Can Only Be 30% or Less Of the Qualifying Income

One of the most significant requirements for using roommate’s rent money to qualify for a home loan is that the checks can only represent 30% of the qualifying income. This is to reduce risk to the lender, as higher percentages increase the chances of problems down the road.

Think from a lender’s perspective. Rent checks can come and go as people move out, and there could be months without a rent check coming in. Despite a long history of renting a room, statistically speaking there is increased risk with renter income. So if the qualifying income is, for example, 80% from the renter, what happens if that rent is no longer being paid? Suddenly the borrower only has 20% of the income they used to qualify. However, if the rent checks are only 30% and they stop, the borrower still has 70% of the qualifying income, which makes paying the rent more manageable.

Say you have a monthly income of $4,000 from work and rental checks of $2,000. Combining the two, you have a total of $6,000 every month. However, the $2,000 is 1/3, or 33%, of the total income, which means this income would not be eligible. However, if you earn $6,000 a month and have $2,000 from rent, for a total of $8,000 monthly, the rent only represents 25%; in this case, the income would be eligible.

Renter Must Have Lived with (And Paid Rent) for a Year

Another significant rule is that the renter must have lived with you and paid rent checks for at least 12 months. If the renter has, for example, only lived with you for 10 months, the rent checks could not be applied to the qualifying income for another two months. Also, if the person has lived with you for the past 18 months, but they only started paying rent 9 months ago, the income would not be eligible.

Rent Can’t Be Paid to a Third Party

This is a requirement that will likely affect property owners that rent out a portion of their property but do so through a property management company. If the checks do not go directly to the borrower, they are not allowed under the rules provided by Fannie Mae. This means if you have hired a property management company, and that company receives the checks, the income will not be eligible. This stipulation may impact other circumstances (such as a family member processing the checks), but hiring a property management company is likely the most common.

What Documents Will You Need?

Beige house with bright green grass
Using a roommate’s rent could help you get approved for a larger loan.

To qualify using a renter’s income, you need to make sure you have the right documents. Review this list and you should have everything you need for qualification.

History of Shared Residency

First of all, you’ll actually have to prove that the renter lives in your residency. There are many documents that the renter can provide to demonstrate they have lived at the house, including:

  • Driver’s license
  • Utility bills
  • Bank statement

As long as the documents show the address, it should be acceptable as proof that they live in the location.

Proof of Payments

This is where you have to prove that the rent is actually being paid, and has been paid for at least 12 months. In most cases, copies of canceled checks can be used as proof. If you don’t have these, the renter may be able to use information from a bank account that shows the rent payments have been made. At least nine of the past 12 months can be used, as long as the rental income is averaged over a 12-month period.

Credit Score

Depending on the situation, your credit score may be needed for qualification. Be sure you have this information ready, or at least have the information that lenders will need to pull your credit score.

Personal Income

The rental income will be compared to your personal income, so you’ll need to verify how much you earn in an average month. Tax information is often used for this purpose, but you may also use bank statements and other financial information.

Verification of Assets

The lender may also need to verify your assets, including bank accounts, retirement savings, and other financial information. Have this information ready for the lenders so they can verify it quickly and help you get qualified.

Using Boarder Income: Fannie Mae’s Example

To clarify the income qualification, let’s look at a simple example provided by Fannie Mae

Let’s say you are a single person who plans to purchase a home, and you have had a roommate, who plans to live with you in a newly purchase home, for the past year. The roommate pays you $375 monthly for rent, and you can verify these payments through canceled checks for 10 of the past 12 months.

The boarder income that can be used to qualify is the monthly rate times the number of months that can be proven divided by 12 (representing months in a year). In the situation we outlined above, it would look like this:

$375 x 10 = $3,750

$3,750 / 12 = $312.50

The rent that can be added to the total monthly income is $312.50.

Adding this income to your monthly total could be the difference between rejection and approval. The amount will reduce your debt-to-income ratio, making you a stronger borrower and increasing the likelihood that you will be approved.

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Want to learn more about how to qualify to buy a home using a roommate’s rent? Contact our staff and we’ll make sure you have the information to succeed.

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