FHA wants added flexibilities for borrowers renting out a bedroom

The Federal Housing Administration (FHA) on Wednesday posted a proposed Mortgagee Letter (ML) that would add flexibility for people receiving rental income from “boarders” who pay for space in an existing dwelling when considering them for an FHA-insured mortgage.

Borrowers receiving rental income from “boarders,” a term referring to “individuals who rent space in borrowers’ homes” according to the Single Family Housing 4000.1 Handbook, would have less stringent underwriting requirements for documenting and calculating this form of income when seeking a new FHA-insured loan, according to the proposal.

“FHA remains committed to extending affordable housing opportunities to its core constituency of first-time and low- to moderate-income homebuyers, including those in underserved communities,” the agency said in its announcement of the proposal. “In doing so, it recognizes that rental income received from individuals renting space in borrowers’ homes is a stable and viable source of income that increases housing affordability and allows borrowers to better manage housing costs.”

The first two elements of the proposal include a reduction in the “acceptable rental income history” from 24 to 12 months for income earned from boarders; and an allowance for borrowers with a 12-month rental history to qualify for an FHA-insured mortgage, “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.”

The proposal would also establish that rental income from boarders used in a qualifying decision “cannot exceed 30% of their total monthly effective income;” and the ML would also expand acceptable income verification documentation for boarders to “include bank statements, canceled checks, and/or deposit slips showing rental payments received.”

The proposed ML is now available to review on the Single Family Drafting Table, an online portal where proposed U.S. Department of Housing and Urban Development (HUD) single-family policies can be reviewed prior to going into full effect.

The agency encourages all stakeholders to thoroughly review the proposed document and to provide feedback on it, which can be done through Dec. 10.

Depending on the amount of feedback received, HUD will have limited time to implement the proposal if current Biden administration leaders plan to see it through. The incumbent president’s term expires at noon EST on Jan. 20th, at which point President-elect Donald Trump will be administered the Oath of Office by Chief Justice John Roberts.