You're ready to buy a new home. You're worried, though, that your monthly income isn't high enough to qualify for the mortgage you need. Here's some good news: If you have a roommate or tenant, you may be able to use boarder income to qualify for your mortgage.
Fannie Mae and Freddie Mac now count boarder income
Mortgage programs by Fannie Mae and Freddie Mac -- the agencies that back most mortgage loans originated in the United States -- now allow mortgage lenders to count boarder income when determining which borrowers qualify for a loan.
Mortgage professionals say this could help more people get into new homes.
"Using boarder income is a great way to not only qualify for a mortgage but also to afford your monthly mortgage payments," said Luke Babich, a real estate agent and co-founder of St. Louis-based online brokerage Clever Real Estate. " Boarder income can help lower your debt-to-income ratio, allowing you to qualify for mortgages you'd be ineligible for without boarder income."
Say your gross monthly income from your job comes out to $5,000. If you also rent a room in your home for $700 a month, your lender will now consider your gross monthly income to be $5,700. With this extra monthly income, you might be able to qualify for a larger mortgage.
Income isn't the only factor that lenders consider. They'll also look at your monthly debt levels and credit score. Having that extra monthly income, though, will make you a stronger borrower.
Related: 10 Tips for First-time Homebuyers
Pick the right mortgage product
To use boarder income on loans backed by Fannie Mae and Freddie Mac, though, you'll have to rely on two loan products from these entities: Fannie Mae's HomeReady program and Freddie Mac's Home Possible.
Both programs allow you to count boarder income as part of your monthly income. But you will have to meet certain requirements.
HomeReady
For the HomeReady loan, only 30% of your monthly income can come from your boarder. This means that most of your monthly income must come from other sources, such as your job. You also have to meet income-eligibility guidelines. In much of the country, your annual income can't exceed 100 percent of the area median annual income.
You must provide your lender with evidence that this boarder has lived in your home for the last 12 months. And that he or she has paid rent for at least nine of these months. Canceled checks from your boarder work well. But if money changes hands online, those records should work also. If you get cash, that is harder. You'll need to start documenting your rent before you can count it.
To prove that your boarder shares a home with you, you can show your lender bills, bank statements or a driver's license with your address and the boarder's name.
For the lender to count this income, your boarder must also plan to live with you, and continue paying, once you move to your new home. Your lender will require a signed letter from you stating this. This makes sense. If your boarder doesn't move with you, that monthly income won't help when you're making your new monthly mortgage payment.
How much your boarder's rental income will add to your gross monthly income varies. If your boarder pays every month, and you can prove that this person has paid rent for the last 12 months, you can simply add that rent to your gross income. But maybe your boarder has only paid rent for the 10 of the last 12 months. In this case, your lender will total the rent your roommate or tenant paid in these months and divide it by 12.
For example, if your boarder pays $400 a month but only paid rent for 10 of the last 12 months, your lender will consider your annual boarder income to be $4,000, or $400 times 10. Your lender will then divide this $4,000 by 12 -- for 12 months -- to get $333.33 a month. You can then add that figure to your gross monthly income.
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Home Possible
The Home Possible loan backed by Freddie Mac works in much the same way. Again, they won't credit income from your boarder that exceeds 30% of your total gross income. Your boarder, though, must have paid you rent for all of the last 12 months.
Again, your boarder must plan to live with you in your new home. You must provide your lender a signed statement confirming that your boarder will still be living with you.
You do not have to complete any education before qualifying for this loan if at least one of the borrowers is not considered a first-time buyer.
Mortgage for the times
Deni Supplee, a real estate agent and co-founder of Spark Rental, a company that provides automated rent collection for landlords, said that this change is a smart one on Freddie's and Fannie's part.
"With rents and home prices having risen quickly over the last decade, more American adults are sharing homes," Supplee said. "It makes sense to allow for this increasingly common household arrangement in qualifying borrowers for a loan."
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