Can I rent out a room in my house to qualify for a refinance?

By Gina Pogol
Mortgage Credit Problems Columnist

Linda asks: Dear Gina, I would like to refinance out of a bad credit mortgage and into an FHA home loan. My credit score is just over 600, but my company cut back my hours and my income is way down. If I get a roommate, can I add the rent payments to my income and get my refinance?

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Gina says:

Hi Linda,

Congratulations on improving your bad credit! Mortgage lenders do allow FHA refinances with credit scores of 600+, so as long as you've been paying your bills on time you should be able to find a mortgage. However, your income may present a challenge.

Unless your home has separate living areas, like an apartment over the garage, or is a multi-unit home like a duplex, the ability to count rents as income is extremely limited. If you absolutely must have rental income to qualify, this is what you'll have to do.

  1. Your roommate / boarder must be related to you by law (for example, an adopted brother), marriage (for example your own spouse, a step-sibling, or an in-law) or blood.
  2. You must declare the income on your tax return (use Schedule E). It works like this: you add the monthly rent to your taxable income, but you deduct depreciation, maintenance and other expenses. Your qualifying income will be more than the taxable income from your rents.

Here's an example of what qualifying looks like:

  1. You rent out 500 square feet of your 2,000-square-foot home (say, a bedroom and a bathroom) to a relative for $500 a month, or $6,000 per year.
  2. Divide your home's value by 30 to get your depreciation deduction. If the property value is $300,000, your result is $10,000. Because you rent out 25% of your home's square footage, you get to reduce your taxable income by $2,500 (25% of $10,000).
  3. Add up your maintenance, utilities and other costs for the year. If that total comes to $8,000, you get to deduct 25%, which is another $2,000, leaving you taxable income of $1,500.
  4. To get the income that can be used to qualify for your refinance, add the depreciation back to your taxable income. In this case that's $1,500 plus $2,500, which is $4,000 per year or about $334 a month.

Finally, you may not have to jump through all these hoops. If you are successfully managing your bills, even if your income is less than it used to be, that's considered a compensating factor. So is the rental income from a roomie. Those two qualification bonuses may be all you need to get approved for your refinance.

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