Okay, so I own one house and rent out the extra bedrooms to friends (boarder income). It seems many banks won't allow me to use my boardsers income at all on my debt to income ratio?

Are there lenders that will recognize this, and can building a boarder's income history on my tax returns help me with qualifying for loans in the furture?

Wow, they should reconize the income if lease agreements are in place. Is that the case?

I would be surprised if they count the rent for roommates based on the lease, but once it hits your tax returns it should be fine. It may all to do with the lender you are working with and how they count lease income period, regardless of where it is coming from.

The lender might view the income as not stable enough to be counted like a regular rental.

I have a similar situation and any loan through freddie/fannie apparently won't allow boarder income. I did find one (rosedale federal) that will allow boarder income but their rate was about 1.5% higher than a normal loan.

@Lee Liberman I actually found a broker that has a bank that will use the "boarder" income as rental income. He didn't seem to think it was a big deal at all. I'm closing a refi with him now, and am doing a new purchase with him in the next few months. And my rate is the same as it would be had all that boarder income just been salary income instead.

I didn't like the idea of a mortgage broker at first, but he's pretty useful.

Awesome. It sounds like that bank isn't in the business of reselling the loans it makes and therefore has more ability to set the rules. I actually found a similar situation through credit unions. Local credit unions allow boarder income and charge rates comparable to other FHA lenders. I would suggest looking into those if you are unable to find a traditional bank to include the boarder income even if it is on your tax returns as was my case.

I am having the same problem with a HELOC through a credit union. May I ask what bank your broker finally connected you with which enabled you to use your boarder income?

@Asher Anthes  

We have bought all of our houses through mortgage brokers. They are honestly the best when it come to helping you get loans. I find they are the most flexible and easy to qualify.

HELOC Application - Boarder vs. Rental Income: Unable to qualify for higher Equity!

I initially requested a set amount on my HELOC application but lender has capped it at $30K less than requested based on debt to income ratio and refused to use the rental income. My guess is that underwrite may be considering my income as "boarder income" in which case I can understand that, because the lender might view the income as not stable enough to be counted like a regular rental.I do however have full leases and it is not "boarder income" but rather "rental income" and hits my tax returns without any issues, so I am just a little confused. So to give you a little insight into my living situation:

I am house hacking in one of my duplex properties. I figured I don't need the extra space in the upper unit plus needed to bring in more cash, so came up with the brilliant idea of renting my upper unit and moving into basement.The property is an official duplex property with approved ADU as registered by Jefferson County.One unit (the one with crawl space) has one address we shall call 1225 Bell Street but falls under the main property address (suspecting this is causing some of the problem) - which we shall call 1235 Bell Street. The second unit, is 1235 Bell street (which also happens to share the name of the property under JEFFCO records) and this comes with approved ADU which is where I live and then rent out the top.The unit has separate entrance, separate bathroom, kitchen and entirely different living space.I never see my tenant so my lease is an official lease not a "roommate" lease so essentially providing "rental" not "boarder income".

The challenge:  Lender does not want to consider rents from either units in evaluating my debt to income ratio.  I have great credit, stable income (10 plus years with same employer and great pay), and I have lived on this property for 2.5 years now.  

Oh boy, I am so trying to fight this with my HELOC application and appeal to lender. I got online and decided to goggle to understand this and have decided to reach out to this community to see if there are any suggestions. Perhaps the obvious suggestion would be to try another lender in the event that it is determined that current underwriting guidelines are incorrect, but I am so hoping that my appeal to lender will be taken into consideration. I was nice and provided the facts in a professional manner and simply appealed to have their underwriting team reconsider based on this. This HELOC means a lot to me, so it is a little disappointing to get this far and hit this hurdle. Any suggestions and/or comments of similar experience will be appreciated. Perhaps am just uninformed on this and need to self-educate. I have heard of stipulations requiring staying in the home for about 2 years (been there 2.5 years) and that some lenders will use 75% of the income. Current credit union will not even use 1%!

My loan officer seems nice and she is trying to go back and fight for me, but at the end of the day underwriting calls the shots. Waiting patiently. Worst case scenario, I just go with the HELOC they approve and try again next year or two with a different lender. The explanation I got was, "they will not count rental income for the same property that you live in ...", which is what got me to try to appeal by explaining my situation.  They also have a copy of the appraisal that explains current setup which supports the above so we shall wait to see.  Just really frustrating is all. 

Originally posted by @Anna M. :

HELOC Application - Boarder vs. Rental Income: Unable to qualify for higher Equity!

I initially requested a set amount on my HELOC application but lender has capped it at $30K less than requested based on debt to income ratio and refused to use the rental income. My guess is that underwrite may be considering my income as "boarder income" in which case I can understand that, because the lender might view the income as not stable enough to be counted like a regular rental.I do however have full leases and it is not "boarder income" but rather "rental income" and hits my tax returns without any issues, so I am just a little confused. So to give you a little insight into my living situation:

I am house hacking in one of my duplex properties.   I figured I don't need the extra space in the upper unit plus needed to bring in more cash, so came up with the brilliant idea of renting my upper unit and moving into basement.The property is an official duplex property with approved ADU as registered by Jefferson County.One unit (the one with crawl space) has one address we shall call 1225 Bell Street but falls under the main property address (suspecting this is causing some of the problem) - which we shall call 1235 Bell Street. The second unit, is 1235 Bell street (which also happens to share the name of the property under JEFFCO records) and this comes with approved ADU which is where I live and then rent out the top.The unit has separate entrance, separate bathroom, kitchen and entirely different living space.I never see my tenant so my lease is an official lease not a "roommate" lease so essentially providing "rental" not "boarder income".

The challenge:  Lender does not want to consider rents from either units in evaluating my debt to income ratio.  I have great credit, stable income (10 plus years with same employer and great pay), and I have lived on this property for 2.5 years now.  

Oh boy, I am so trying to fight this with my HELOC application and appeal to lender. I got online and decided to goggle to understand this and have decided to reach out to this community to see if there are any suggestions. Perhaps the obvious suggestion would be to try another lender in the event that it is determined that current underwriting guidelines are incorrect, but I am so hoping that my appeal to lender will be taken into consideration. I was nice and provided the facts in a professional manner and simply appealed to have their underwriting team reconsider based on this. This HELOC means a lot to me, so it is a little disappointing to get this far and hit this hurdle. Any suggestions and/or comments of similar experience will be appreciated. Perhaps am just uninformed on this and need to self-educate. I have heard of stipulations requiring staying in the home for about 2 years (been there 2.5 years) and that some lenders will use 75% of the income. Current credit union will not even use 1%!

My loan officer seems nice and she is trying to go back and fight for me, but at the end of the day underwriting calls the shots. Waiting patiently. Worst case scenario, I just go with the HELOC they approve and try again next year or two with a different lender. The explanation I got was, "they will not count rental income for the same property that you live in ...", which is what got me to try to appeal by explaining my situation.  They also have a copy of the appraisal that explains current setup which supports the above so we shall wait to see.  Just really frustrating is all. 

 Hi Anna,

I highlighted a very relevant portion above. Fannie and Freddie do not acknowledge the existence of 2-4 unit properties with ADUs. Only an SFR can have an ADU. HELOC lenders do not have to follow Fannie/Freddie, but most do. I suspect that your LO was probably pretending they didn't know it was a duplex w/ an ADU, as that would have been an automatic decline, no questions asked, no matter your income, DTI, or credit.

In order to make this property financeable with three units (one you live in, two that you rent), I'd suggest talking to the city/county about getting it formally rezoned into being a triplex. This will almost certainly translate into a higher sales price when/if you go to sell it, to boot.

Here it is direct from the source:

So you could either scale it down to being an SFR (which I don't think would be the best idea & note the final bullet point above), or go the other direction and make it a triplex (I like this one). Either way, get out of the "duplex w/ an ADU" permanent holding pattern purgatory. :)

Alternatively, you can seek portfolio financing. Because it cannot be sold as a conforming loan on the secondary market, and all profit to the lender must come from your pockets, the loan will be characterized by some combination of ARM only, higher rate, lower LTV, and higher points/fees.

Wow, @Chris Mason , thank you.  This is so much information that I had absolutely no idea about.  I love the idea of re-zoning into a triplex and will chase that a little more to see if I can do that.  I reached out to the lender yesterday and will see what they say today following my explanation.  "No News Maybe Good News right?"  All in all, going to see what they say.  On the positive side, I had at the time also been working with a second credit union in the event that I run into hurdles.  So if this credit union does not work out, I am hoping the second will.  Thanks again Chris, I really like your input and have actually saved this post to my zoning folder to use. 

@Asher Anthes  I’m interested in learning who you were working with.