Today, the Federal Housing Administration (FHA) posted a draft Mortgagee Letter (ML), proposing greater flexibility for borrowers who receive income from individuals renting space inside their property, also called "boarders" by the Single Family Housing Policy Handbook 4000.1.
The proposed revision expands underwriting flexibility for borrowers seeking FHA-insured mortgages using that rental income.
The draft ML, “Revisions to Policies for Rental Income from Boarders of the Subject Property,” was posted today on the FHA’s Office of Single Family Housing Drafting Table (Drafting Table) for industry feedback. The proposed flexibilities include revisions to the required underwriting standards for documenting and calculating this type of income.
FHA’s proposed underwriting guidance would:
- Reduce the acceptable rental income history from two years to 12 months from individuals renting space inside the borrower’s home;
- Allow borrowers with a 12-month rental history to qualify for an FHA-insured mortgage using income from renters living in the home, provided the income has been received for at least nine of the most recent 12 months, is currently being received, and is averaged over a 12-month period;
- Establish that rental income from individuals renting space inside the home that is used to qualify borrowers for an FHA-insured mortgage cannot exceed 30% of their total monthly effective income; and,
- Expand the types of acceptable income verification documentation for individuals renting space inside the home to include bank statements, canceled checks, and/or deposit slips showing rental payments received.
FHA programs permit for the purchase, rehabilitation, or refinance of properties that include a single accessory dwelling unit (ADU). Today's proposal by the FHA comes after last year's revision, in October 2023, that allowed rental income from ADUs to be used in calculating a borrower’s effective income for FHA-insured loans.
As tough market conditions persist, the FHA recognizes that rental income from boarders can enhance the potential to build generational wealth and increase homeownership for first-time homebuyers, low- to moderate-income borrowers, and those in underserved communities.
The draft ML states that rental income can contribute to mortgage payments and help borrowers sustain long-term homeownership.
The FHA encourages stakeholders to review the draft ML and provide feedback by Dec. 10, 2024. Instructions for providing feedback are posted on the Drafting Table.
