Using Boarder Rental Income to Get a Mortgage Loan in California

Homeowners who have renters or boarders renting out a room in their primary residence could potentially use that income to qualify for a mortgage loan in California. While not as common as traditional income sources, boarder rents (or “room rents”) can be counted toward the borrower’s total income. This in turn could help the homeowner qualify for a home loan.

Here’s what you should know about using boarder rental income to qualify for a mortgage loan in California.

Boarder Rental Income When Applying for a Mortgage

There are different types of income, and many of them can be used when applying for a home loan. For a “typical” borrower, job-related income is used for mortgage qualification purposes. But some people have additional income streams beyond their regular jobs. Boarders and renters are one common example.

Some homeowners live in their homes but also rent out a room (or section) of the house to a renter / boarder. This provides a secondary but steady income stream in the form of monthly rents.

These days, there are several programs that allow boarder rental income to be counted for mortgage qualification purposes. Both Fannie Mae and Freddie Mac (the government-sponsored corporations that buy loans from lenders) allow mortgage lenders in California to count boarder and renter income when considering applicants.

The Standard Rules and Requirements

Using boarder rental income could help a person qualify for a home loan in California. It also helps the borrower afford the monthly mortgage payments. It’s a viable source of income and can therefore be included within the home loan underwriting and approval process.

But there are certain rules and requirements for using boarder rent income for mortgage application purposes. Most of these rules come from Fannie Mae and Freddie Mac, the two agencies that back most of the home loans in California and nationwide.

Here are Fannie Mae’s basic requirements:

• Up to 30% of the borrower’s qualifying income can come from boarder rental income.
• The borrower must provide documentation “for at least 9 of the most recent 12 months (averaged over 12 months) and documentation of shared residency for the past 12 months.”

Freddie Mac has similar guidelines for using rental income, particularly the 30% rule. As it states on their website:

“Rental income from a one-unit primary residence can account for up to 30 percent of qualifying income. Any portion of the borrower’s rental income from their one-unit primary residence that exceeds 30 percent of the borrower’s total income cannot be used to qualify the borrower.”

There are some documentation requirements as well, when using boarder rental income to apply for a mortgage in California. Lenders are required to obtain documented proof of shared residency as well as the actual rent payments. A letter of intent from the renter might be needed as well, stating that they plan to continue renting.

Shared residence can be documented with anything that “shows the boarder’s address as being the same as the borrower’s address,” according to Fannie Mae. This might include utility bills, bank statements, W-2 forms, or a copy of the driver’s license. Basically, anything that shows the renter’s address is the same as your primary address. Bank statements can be used to show a history of rental payments.

Accessory Dwelling Unit (ADU) Income Also Acceptable

The information above applies to borrowers who have a renter / boarder living within their primary address. But what about homeowners who have accessory dwelling unit (ADU) renters? This kind of rental income can also be used when applying for a mortgage loan in California, and the requirements are similar.

Definition: An accessory dwelling unit, or ADU, is a second (and usually smaller) home located on the same lot as a primary residence. An ADU can also be attached to the main home. Examples include a tiny house or “granny flat” in the backyard, backyard cottages, a basement in-law apartment, a converted garage, etc.

As far as Fannie Mae and Freddie Mac are concerned, the secondary residence must have a kitchen and bathroom to be considered an accessory dwelling unit. In other words, it can’t just be a room by itself. It must be a complete living space with kitchen and bath. Local ordinances usually require this as well.

Fannie Mae allows for ADU rental income within their HomeReady mortgage program. This program also allows for a down payment as low as 3%, which makes it popular among borrowers. According to Fannie Mae’s guidelines: “Income generated from an accessory unit can be considered as rental income under HomeReady in accordance with our standard rental income guidelines.”

Many Ways to Qualify for a Mortgage Loan in California

Mortgage programs available today offer a broad range of options for borrowers. Some programs allow for boarder rents to be used when applying for a home loan. Some allow for financial assets to be used. And this just scratches the surface.

The point is, there’s more than one way to qualify for a mortgage loan in California. The most common scenario is for a borrower to use the monthly income gained through employment. But there are other forms of income as well, and many of them can be used (to some extent) for mortgage application purposes.

Note: This is a basic overview of using boarder rental income to qualify for a mortgage loan in California. Depending on your financial situation and other factors, you might encounter additional requirements not mentioned above. The rules and requirements can vary based on the loan program being used. Please contact us if you have questions or would like to begin the mortgage application process.