Financing in Iowa City>Question Details

John C, Home Owner in Iowa City, IA

Can rental income be used to bolster total income when refinancing?

Asked by John C, Iowa City, IA Thu Aug 8, 2013

My fiance and I recently split up, and she's keeping the house. She wants me to sign a quietclaim but before I do that I want her to refinance the loan into her name only. The mortgage payment is currently about 48% of her monthly income. She is currently renting the house out to three other people while living there. Can she use the rental income when looking to refinance or assume the loan? if she can, then her mortgage payment will only be 35% of her total "income". From what I understand thats about where a lender would like to see the income levels.

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Gregorio is correct. This is not technically "rental" income since she lives in the home too. This is considered "boarder" income.

On a conventional loan, boarder income is not permitted unless you meet the exception below. FHA, in some cases, allows boarder income though. It has to be documented on her tax return though, and the boarders need to be related by blood, marriage, or law. If those circustances don't apply either, it can't be used to bolster income.

When approving a mortgage, lenders look not only at the mortgage payment as a percentage of income, but also her other debts combined with the mortgage, such as car payments, credit cards, and student loans.

48% is super high for just the house. That''s about the limit for ALL debts (sometimes you can go up to 50%).

If she can get a relative with good income and credit to co-sign on the loan with her then FHA might be an option. Other than that I don't see any good solutions unless she wants to sell the home.

You are right to not sign a quit claim. If you are on the mortgage currently then why should you give up any interest in the home when you are still liable on the mortgage?

Hope this helps!
0 votes Thank Flag Link Thu Aug 8, 2013
Actually, border income cannot currently be used at all. See Fannie Mae Selling Guide B3-3.1-09, Other Sources of Income.

Quote:

"Boarder Income
Income from boarders in the borrower’s principal residence or second home is not considered
acceptable stable income with the exception of the following:
• When a borrower with disabilities receives rental income from a live-in personal assistant,
whether or not that individual is a relative of the borrower, the rental payments can be
considered as acceptable stable income in an amount up to 30% of the total gross income that
is used to qualify the borrower for the mortgage loan. Personal assistants typically are paid by
Medicaid Waiver funds and include room and board, from which rental payments are made to
the borrower."
0 votes Thank Flag Link Thu Aug 8, 2013
The rental income will only be counted if she has two years of documented experience as a "Landlord"
This means two full years of leases, and books showing income and expenses.

This may present a challenge I don't know.

Another option would be to speak with a local credit union who because they hold their loans in-house and don't sell them on the secondary market do not have to deal with the same secondary market requirements that traditional lenders have to work with and can be considerably more flexible.

If your relationship is still relatively amicable it may make sense for you both to sit down with a lender and or financial adviser and attorney and work to put together something that works for everyone involved.
0 votes Thank Flag Link Thu Aug 8, 2013
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