New FHA Boarder Income Rule Could Boost Homebuying Budgets By $50,000
The Bottom Line
Homebuyers using FHA loans will soon be able to use roommate and boarder income to qualify when they meet certain guidelines.
Starting March 2025, eligible homebuyers can start using income from boarders and roommates to qualify for a mortgage.
HUD, the overseer of the FHA program, issued Mortgagee Letter 2025-04, updating long-standing rules about using rental income from those living with the mortgage applicant and planning to live in the property being purchased.
According to HUD, the move will open affordable housing opportunities “to a broader spectrum of first-time buyers and individuals with Low- to Moderate-Incomes.”
New Roommate/Boarder Income Rules for FHA Loans
Starting March 14, 2025, an FHA homebuyer may be able to use rental income from an existing boarder to qualify for the mortgage.
A boarder can be a roommate or someone renting a room or space in the mortgage applicant’s current residence. The rule applies even if the homebuyer is currently renting. The boarder must be paying rent to the mortgage applicant.
How The New Rule Might Help a Homebuyer
We estimate that buyer who makes $72,000 per year might increase their eligible home price by $50,000 assuming $800 in monthly boarder income.
This rule change could be a major boost for first-time buyers struggling to afford anything in their market as home prices and mortgage rates remain elevated.
FHA typically allows a buyer to use around 40-50% of their before-tax income for the full housing payment plus all other debt payments.
Here’s a table showing how this new rule might boost the maximum home price a buyer might qualify for.
Without Boarder Income | With Boarder Income | |
Total Income | $6,000 | $6,800 |
Debt Payments | $500 | $500 |
Max Full Housing Payment (45% DTI) | $2,215 | $2,560 |
Maximum Home Price* | $260,000 | $310,000 |
*Assumes 3.5% down 30-year FHA loan, standard MIP, 7% rate, $300 taxes, $100 insurance, $500 in other debt payments. 45% DTI. All figures for example purposes only. Not everyone will qualify.
In this example, the homebuyer may qualify for a much better home leveraging FHA's new rules.
How To Qualify to Use Boarder Income
To use boarder income on the application, the homebuyer must provide:
Proof that the boarder has been living with the homebuyer for at least 12 months.
Receipt of rental payments over at least nine of the last 12 months.
Provide tax returns, bank statements, canceled checks, or deposit slips showing receipt of rental income
Evidence that the boarder’s address is the same as the homebuyer’s.
A written agreement showing the boarder will continue to live with the homebuyer and the terms.
Here’s an example to clarify what FHA is looking for.
Joe Homebuyer rents a 2-bedroom apartment at an apartment complex. He has rented the second bedroom to a friend for the past 12 months. Joe Homebuyer collects rent from his friend each month, then pays the entire rent payment to his landlord.
Joe Homebuyer applies for an FHA mortgage. He asks his friend to continue living with him in the new home, to which his friend agrees. Joe submits proof that his friend has been living with him and paying rent for the last 12 months, plus the friend’s agreement to continue living in the new home. The lender allows Joe to use this income to help qualify for the home purchase.
What Were FHA’s Previous Rules?
Prior to the rule change, FHA allowed applicants to use income from boarders, but with must stricter requirements.
To use the income, the buyer needed to provide two years of tax returns showing a history of receiving the boarder income.
New rules reduce the history to one year, and allow bank statements and canceled checks as proof of receiving rent.
The rule change will help buyers who have rented to boarders for shorter periods, have not claimed the income on tax returns, or have less formal arrangements with the live-in renter.
How Will Boarder Income Be Calculated?
Lenders will examine both past and expected rent figures to calculate how much you can use on your mortgage application.
The lender will use the lesser of:
The 12-month average of rents received
Proposed rent for the new home as stated in the agreement
For example, the homebuyer has received $6,000 in rent over the past 12 months, or a $500-per-month average. The rental agreement for the new home shows $450 per month. The lender will add $450 per month to the buyer’s other income sources.
However, if the future rental agreement showed $600 per month, the lender could only use the existing amount of $500 since it’s lower.
There is one caveat, though. The rental income can make up no more than 30% of total qualifying income on the application. To use $500 in rental income, for example, the buyer would have to show at least $1,667 in total income, including rental income.
Set Yourself Up to Use This Program In the Future
If you’re planning to buy in the next year or two, set yourself up to use the rule to boost your qualifying income.
Find a roommate or boarder to rent a portion of your current rented home or apartment
Let them know you’ll be moving in a year and would like them to move with you at that time.
Collect 12 months of rent and document the deposits.
In a year, write up an agreement showing the boarder's intent to rent at the new home, and the terms.
In just 12 months, you could significantly boost the home price you qualify for.
New Boarder Income Rule Helps You Afford a Bigger Home
First-time buyers are meeting affordability issues like few times in history. Not since the 1980s have homes been so difficult to buy.
Buyers are now forced to settle for homes that don’t suit their needs or continue renting.
This rule change could help many buyers afford homes in that next pricing tier that will get them a bigger, more updated, or more centrally-located home.
