Income requirements can often make or break a loan approval. If you do not have income that is high enough to bring your debt ratio down to manageable levels, most loan applications will get denied. With HomeReady™ Loans, however, this is not the case. The amount of income required or even allowed for a particular loan depends on the area it is located. Right now, more than 50 percent of the census tracts in the United States have requirements that borrowers cannot make more than 100 percent of the average median income for the area, while the remaining 50 percent can make a maximum of 80 percent for the area. The HomeReady™ website has an Income Eligibility tool that enables you to determine the maximum amount of income allowed for your area.
Borrower and Co-Borrower Income
In general, only the borrower and co-borrower income is considered for eligibility purposes. Any borrowers that are on the application and are using their credit worthiness to qualify for the loan, must disclose their income in order to qualify for the program. In the event that the debt to income ratio for these borrowers is higher than 50 percent, the loan automatically receives a denial. On the other hand, if the debt to income ratio falls between 45 and 50 percent, the borrowers have the opportunity to include other household income into their qualifying factors, a unique factor to the HomeReady™ Loan.
Non-Borrower Household Income
Non-borrower household income is considered a compensating factor. Just like you might use excessive reserves, a high credit score, or a low debt ratio to help make a conventional loan application look more enticing, for the HomeReady™ program, non-borrower income can be that compensating factor. The household members providing the income are not official borrowers – their credit information is not used to qualify for the loan. Instead, their income is used to help bring the debt ratio down. The requirements to use the non-borrower income are as follows:
- The income must total at least 30 percent of the borrower’s income in order to be used
- The 30 percent can be reached by combining several extended household members’ incomes together
- The income used for non-borrowers must be able to be proven in the same manner as the income is evaluated for borrowers, such as using paystubs, W-2s and tax returns
- The non-borrowers do not have to be related to the borrowers
- The non-borrowers must agree to live in the home for the next 12 months and prove it by signing an official letter or document
Non-borrower income is not a requirement to get approved for HomeReady™ loans, however. If your debt ratio is lower than 45 percent, you are not even able to use non-borrower income to qualify. The income used is meant to help make your loan less risky, but it is not meant to give you a higher loan amount. This is why non-borrower income cannot be used as a qualifying factor – it is simply used in the event that your debt ratio were to fall within that 45 to 50 percent range, as studies have shown that borrowers within that range that live in a low income census tract are able to effectively make their mortgage payments on time with the help of adult children, parents, extended relatives, and even boarders.
The Unique Income Factor
One of the unique aspects of HomeReady™ Loans is the ability to use rental income on a one-unit property in order to qualify. This income is not considered non-borrower income, but rather, is qualifying income for the borrower. The only requirement in order to be able to use rental income on a one-unit property is that there must be an accessory unit on the property to rent out. This accessory unit could be attached to the property or unattached. An example of an attached accessory unit would be an apartment in the basement.
In order to document the income for the accessory unit, the borrower needs to provide a rental agreement or lease signed by all parties. In the event that a lease was not drawn up, the lender can use the Fannie Mae Comparable Rent Schedule to determine the appropriate amount of rent for the area. This enables you to include rental income in your qualifying income.
You can also use boarder income to qualify for a HomeReady™ Loan. The difference with boarder income is that the income comes from someone that lives inside the home, such as someone that rents out a bedroom in your main living area. This income needs a history in order to qualify, though. This means that you have to prove that the boarder lived with you for the last 12 months. The exception to the rule is if you do not have a full 12 months’ worth of proof of boarder income, but can provide at least the last 9 months – the lender will be allowed to average the income over the 12-month period for qualification purposes.
The largest factor in determining eligibility for HomeReady™ Loans is the credit score of the applicant. The HomeReady™ program was designed for borrowers that are creditworthy, yet do not have high enough income to qualify for a loan. These borrowers are able to become homeowners as a result of the extended household income and the use of rental or boarder income while helping the low-income and high minority census tracts thrive at the same time.Click to See the Latest Mortgage Rates»