HomeReady is a lifesaver for many home buyers. For example, if you have a spouse or child that you do not want on the actual mortgage and/or deed, this program allows a portion of their income to be used to help you qualify for a mortgage. This is perfect for couples that may have a credit challenged spouse, who is unable to go on the loan application. In another scenario, a buyer may have a roommate who will be moving into the buyer’s new home, but the roommate is not going on the deed or mortgage. The HomeReady ™ mortgage program will allow buyers in these and many other eligible situations to use other household income, without sharing ownership and without the other party’s credit history being a factor.
If you have been denied for a mortgage before, due to debt to income restrictions, you may be able to use the documented income from other members of your household to qualify for a mortgage, without the other household member’s credit being a consideration.
WHO IS AN ELIGIBLE NON-BORROWER?
People that have lived with you in your home and are not a party to the loan are referred to as Non-Borrowers. For instance, if you and your partner are interested in purchasing a home, and you have a debt ratio of 45%, your loan application would not get approved, because the maximum debt ratio allowed under the Qualified Mortgage guidelines is 43%. So you are left with less favorable loan products or a denial. However, if you have people living with you, such as your adult children, friends or extended family members, you can leverage a percentage of their documentable income to qualify for the mortgage loan. In this circumstance, the lender sees the non-borrowers income as a compensating factor. Studies have revealed that families living in high minority and low income areas usually have many friends or family members living together with them to survive. Under the HomeReady ™ guidelines, a non-borrower may not necessarily be a blood relative.
HOW TO DOCUMENT HOUSEHOLD MEMBERSHIP
Fannie Mae provides guidance on the proper way to document that a person is an eligible non-borrowers. Before the non-borrower income can be considered, you must officially document the household membership. You will need this Fannie Mae Form 1019 to get started. On this form, the non-borrower must fill out his/her full name, income source and amount of income per month. In addition, all non-borrowers must sign a statement at the end of the form declaring that they will live with the borrower for the next twelve (12) months or more.
DOCUMENTING NON-BORROWERS INCOME
According to the Fannie Mae Form 1019, the non-borrower is required to provide enough evidence to document his/her income. Although loan qualification is not based on the amount of income, and the non-borrower is not required to submit his/her credit information, it is necessary to verify the non-borrower income properly. The reason for this is that the lender sees the non-borrower as a helper to the borrower in terms of household expenses.
For instance, a man claims that his father will be living with him. He is buying a home with the HomeReady ™ mortgage program and his debt ratio is 46%. His father’s monthly income is $1,000. The lender will still have to verify the father’s income. This would reassure the lender that the father will have the capacity to assist with the household expenses, if the son is not able to cover all household expenses.
To verify a non-borrower’s income, the following must be provided by the non-borrower:
This non-borrower’s proof of income will be used by the lender to confirm or verify the income, and after it has been verified, the lender will use it as a compensating factor. The proof of income will also allow the lender to know if the non-borrower income is at least 30% of the borrower’s total income. Plus, the income must have a strong probability of continuance. If the income is temporary or for a set period of time (like alimony or child support), be prepared to document that the non-borrower’s income will continue for at least 3 years from the date of closing.
WHEN NON-BORROWER INCOME IS UNUSABLE
Non-borrower income is unusable in certain situations. While the HomeReady ™ loan guidelines are flexible, there are certain limitations to the usage of this income to prevent people from abusing the program. The examples below depict these situations.
Though the HomeReady ™ loan is flexible because it allows non-borrower income to be used, it is essential that you adhere to the strict guidelines. Therefore, speaking with an experienced mortgage professional is highly advised. Navigating through the debt ratio calculations and program guidelines can be very tedious for a consumer. However, a mortgage professional who specializes in HomeReady ™ mortgage products will be able to give you the best available options, so you can make an informed decision.