FHA guidelines require the home that you purchase to be your primary residence. However, if you purchase a single-family home, you may be permitted to earn rental income by renting out a room.
- Does FHA allow you to rent out a room in a single-family property?
- Can you use future roommate/boarder income to qualify for the loan?
- Is it better to buy a single-family and rent out a room or buy a duplex?
- Obtain a lease agreement when you rent out a room
- How much should I charge for a room in my future home?
- How long you have to live in the home before you rent out the entire place?
- Renting out a room with FHA: Pros and Cons
- Risks of renting out a room in your future home
- See if you qualify for an FHA loan – with or without a housemate
Does FHA allow you to rent out a room in a single-family property?
The FHA requirements are clear that when you purchase a single-family home, you must live in that home for at least one full year. What many people do not know is you can rent out a room or a portion of the home that is not being used by the primary owner to earn additional income.
When renting out one or more bedrooms, FHA considers the tenants who reside in the same dwelling as the primary owner to be boarders.
We will discuss how boarder income can be used to help qualify for an FHA loan.
Can you use future roommate/boarder income to qualify for the loan?
If you are purchasing a single-family home using FHA financing, it is difficult but not impossible to use the future boarder income to qualify for the mortgage. It’s much easier to use rental income from a multifamily home.
Boarder income can be used to help qualify for an FHA loan if:
- The borrower has a two-year history of receiving boarder income
- The borrower is currently receiving boarder income
- The borrower can document boarder income on tax returns
The key element to use the boarder income to qualify for the mortgage is you must move the boarder tenants from your current home into your new home AND those tenants must provide a written commitment to continue renting as a boarder in your new home.
The required documentation that must be provided to the lender is as follows:
- Written commitment from the boarders to continue renting as a boarder from the borrower
- Last two years tax returns with evidence of boarder income
- A current lease agreement
Calculating boarder Income for an FHA Loan
If your boarder income meets the criteria above to be used as income on your FHA loan application, it will be calculated as follows:
The lender will look at the income earned over the past two year’s average and also the current lease. Then, they will use the lower of the two.
For example, if your boarder income on average over the past two years was $500 per month but your current lease is $600 per month, they must use $500 as the amount added to your monthly income.
Is it better to buy a single-family and rent out a room or buy a duplex?
From an investment standpoint, it may be better to own the duplex because that rental income is likely to continue if you sold the home to a new owner. Most people will not consider boarder income in a single-family home as a viable option.
The next thing to consider is what type of property you prefer to live in and whether you want to be a landlord.
A single-family home offers the most privacy and does not have the role of being a landlord. Owning a duplex means you are sharing a yard and potentially a driveway with your tenants. There is the potential for noise and other issues when living and also renting out a unit in a duplex.
If you plan to finance a duplex using an FHA loan, your loan limit will be higher than if you purchased a single family home. Buying a duplex also is a great way to begin owning rental properties.
In the end, it is a personal decision and a single family may be better for one person while a duplex may be best for someone else.
Can I rent out the whole single-family home except one room that I live in?
You can rent out the portion of the home that the owner does not occupy. The guidelines require that you live in the home, and contains no stipulation about what percentage of the home you must use.
If you purchase the home with an FHA loan, you can rent out your garage for someone to store a classic car, your basement for storage, or a bedroom to a boarder. These are just a few examples.
What you will also need to verify are the local ordinances on renting out portions of your home or property.
Obtain a lease agreement when you rent out a room
It is just as important to obtain a lease agreement when renting out a room as it is if you were renting an entire home or apartment.
The lease agreement will help document and protect you in the event your boarder does not pay the rent and you need to go to court to collect or even evict them.
Having a lease agreement will also benefit you if you plan to use the boarder income to qualify for a future FHA loan regardless of whether it is a purchase of a new home, or to refinance the existing home.
Your lease should clearly outline what portion of the home the boarder will have access to. Is it just the bedroom? Is there a particular bathroom they must use? Can they use the kitchen and also store food in your refrigerator? Are they allowed to have a party or store a car in your garage? All of these questions (and more) should be clearly answered and defined in the lease agreement.
You can find plenty of low-cost or free lease agreements online, but it’s worth paying a bit to have a professional agreement worked up. A little time and effort can save you weeks of headache later.
How much should I charge for a room in my future home?
The amount you can or should charge for a room is based upon market value and also your relationship with the future tenant.
We suggest determining how much a two bedroom home would rent for in the neighborhood, then start by asking for half of that amount. But other factors might come into play, such as whether the tenant has access to a private bathroom, kitchen, yard space, or other amenities.
Ask yourself how much it is worth receiving in exchange for the nuisance factor of having someone live in your home.
How long you have to live in the home before you rent out the entire place?
The only requirement is that you live in the home as your primary residence for the first year after closing on the FHA loan.
You can move out of the home one year later and rent the entire home while retaining the FHA financing on the property.
This rule is in place for both purchase and refinance FHA loans. If you move out one year later but decide at some point to refinance with an FHA (or conventional) owner-occupied loan, you are required to move back into the home for one year. Some lenders may want you to be living in the home at the time of application. Otherwise, you will be charged higher, non-owner-occupied rates, which may make the refinance of no benefit.
Renting out a room with FHA: Pros and Cons
There are various pros and cons of renting out a room with an FHA loan. Some of them are applicable regardless of whether you are financing the purchase with an FHA loan.
- The additional income can help offset the monthly mortgage and costs of homeownership
- You may be able to use the future boarder income to help qualify for the FHA loan
- You can get your feet wet as a landlord without owning a multifamily home or a separate residence
- There are fewer rules when buying a single-family home compared to a multifamily, i.e. no self-sufficiency test
- To use the income to qualify, you will need to establish a two-year track record of renting to boarders before applying for the FHA loan
- Living with a tenant under the same roof can be challenging
- You will have less privacy
- There is the potential for disagreements on the tenant’s use of the property
- Some states have eviction laws which may limit your ability have the boarder removed from the property
Risks of renting out a room in your future home
Some of the risks of renting out a room include privacy and security. You have a potential stranger living in your home where you also may keep valuables and personal documents.
Borders can sometimes turn into squatters if you do not take precautions to protect yourself from that situation. It is important to learn about the eviction laws in your area should that occur.
If you decide to sell the home, you may have a problem removing the tenant that is occupying one of the rooms.
Finally, you risk having disagreements over how much the tenant is responsible for when it comes to utility bills, other expenses, and even cleaning. Once again these things must be outlined and clearly defined in your lease agreement.
As long as you live in the home as well, you can rent out any portion of the home, including a bedroom, garage, basement, or other space.
For FHA loans, conventional, and most other loan types, you must live in the home for 12 months after the closing date. After that, you can rent out the entire home.
FHA does not specify a limit for the number of boarders, but make sure the home stays sanitary and safe. Make sure the home’s systems like the septic tank, hot water heater, etc. can handle the number of occupants. Comply with local codes and ensure there is adequate parking.
Yes, you may rent out an accessory dwelling unit that’s on the single-family home’s property, but you can’t use that future income to qualify.
See if you qualify for an FHA loan – with or without a housemate
Finding a housemate and using an FHA loan can be a great idea, if you do it wisely.
See if you are eligible for an FHA loan and check your scenario with a lender. You might find out that you qualify right now, even without using future boarder income.