FHA looking at rental income underwriting change

The Federal Housing Administration is considering changing its underwriting guidelines to make it even easier to include borrower's rental income.

A new draft mortgagee letter was issued for feedback on Nov. 20, with responses accepted until Dec. 10.

Last week, the Department of Housing and Urban Development released its annual report that noted the Mortgage Mutual Insurance Fund's capital ratio grew to 11.47%, renewing calls from the lending industry and affordable housing advocates to increase flexibility by ending the life-of-loan requirement, with some calling for additional cuts in the premium beyond what the Biden Administration already did.

The government agency, which provides mortgage insurance as a credit enhancement for low down payment borrowers, especially first-time home buyers, said the change will expand its markets.

"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," a memo announcing the proposal said. "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 Mortgage Bankers Association was positive on the potential revisions to the guidelines.

"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. "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."

The organization looks forward to continued engagement with the FHA on this and other recent proposed policy changes, Mills added.

Among Gen Z in particular, much discussion has come up surrounding house hacking, or the willingness to share their homes with friends in order to increase affordability.

This demographic is expected to grow its share of mortgagors to nearly one-quarter of the market, according to a recent Boston Consulting Group report.

In 2023, FHA came out with revisions for the underwriting treatment of rental income from accessory dwelling units.

HUD terminology defines someone renting in another person's home as a boarder. The draft mortgagee letter is currently titled "Revisions to Policies for Rental Income from Boarders of the Subject Property."

The draft notes the industry is looking for more flexible approaches to rental income as well as alignment with standards in other parts of the market.

As put out for comment, the proposal would reduce the acceptable rental income history to a 12-month period from two years when it comes to individuals renting space inside the borrower's home.

The income would be allowed to be used to underwrite the loan as long as it has been received for at least nine of the most recent 12-month period, but it would have to be averaged.

This rental income cannot exceed 30% of the borrower's total monthly effective income.

It also would expand the types of acceptable documents for verification to include bank statements, canceled checks and/or deposit slips showing rental payments received. The borrower's tax returns are also acceptable.

The boarder's address must match that of the borrower, and a written agreement containing the terms of the arrangement must be supplied.