FHA letter sets underwriting guidelines for boarder income

The Federal Housing Administration, following up on its November draft, has produced a mortgagee letter expanding its guidelines for borrower rental income.

The draft went out on Nov. 20, 2024, and the agency took responses until Dec. 10.

It also was issued shortly after the Department of Housing and Urban Development reported the Mortgage Mutual Insurance Fund's capital ratio was 11.47% for fiscal year 2024, bolstering the argument of those looking for the FHA to loosen its policies.

This new guideline has an effective date for FHA case numbers assigned starting March 14.

Changing dynamics in the housing market are responsible for this new policy, the background section of Mortgagee Letter 2025-04 states. In particular, it does look to be in response to the trend, especially among Gen Z, of house-hacking, or getting income from renting to friends, in order to be able to afford to buy a home.

"A key aspect of this housing evolution is the increasingly relevant discussion around Boarders and Rental Income from Boarders of the subject Property," the letter, signed by Federal Housing Commissioner Julia Gordon, said. "Recent research highlights a significant increase in such living arrangements over the last decade, with a pronounced rise in recent years due to shifts such as the pandemic and other economic and cultural influences."

The mortgage industry has been advocating for more flexible approaches to qualify borrowers using rental income.

This new policy does not include income from accessory dwelling units. In 2023, FHA put out a policy that allows for 75% of estimated rental income from an ADU to be included for underwriting.

Under the new policy, rental income from a boarder can be considered to be "effective income" for underwriting purposes if the borrower has a 12-month history of obtaining revenue from this source. But this source cannot be more than 30% of the effective income used to qualify the borrower, the mortgagee letter stated.

Lenders need to document and verify this income, including having evidence of the rental history over the previous 12 months and a copy of a written agreement between the borrower and the boarder with the terms of the arrangement and a commitment for the latter to continue residing in the property.

The mortgage industry is supportive of this move by the FHA as the Biden Administration wraps up its term in office.

"CHLA welcomes this constructive FHA underwriting change, which reflects the growing reality of homeowners renting out their home," Scott Olson, director of the Community Home Lenders of America, said in a statement. "This is part of a welcome longer term effort underway at FHA to provide more flexible underwriting guidelines that reflect lifestyle changes such as more people working in the gig economy and accessory dwelling units."

When the draft letter came out in November, the Mortgage Bankers Association reacted positively to the potential change.

"Developing consistent and aligned policies around how to underwrite rental income is a priority for our members," Pete Mills, senior vice president of residential policy and strategic industry engagement, said in a statement at that time. "Given current affordability challenges — especially for lower-income families — these enhanced rental income flexibilities will help to safely expand homeownership opportunities for eligible borrowers using rental income for a home purchase."