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Posted On: 04/07/2010

QUESTION

I purchased a home with a land contract and have about four years remaining. I want to refinance. If I rent out a part of the house to a boarder as a separate apartment will that income count when I make a loan application?

ANSWER

A land contract is an installment purchase so you likely do not have a “purchase” as of yet. Title will not transfer to you until some or all payments have been made.

Loan programs have traditionally not allowed income from a roommate or boarder to count when qualifying a homebuyer, the argument being that such income may be unsteady. Now, however, you may be able to qualify for some mortgages if you can prove that the income is regular and ongoing (say if you have rent checks for the past year), if there's a written rental agreement, if the income has been reported on tax returns, etc.

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The Federal Housing Authority, as one example, says “income from roommates in a single family property occupied as the borrower's primary residence is not acceptable. Rental income from boarders however, is acceptable, if the boarders are related by blood, marriage, or law.

“The rental income may be considered effective, if shown on the borrower's tax return. If not on the tax return, rental income paid by the boarder may be considered a compensating factor, and must be adequately documented by the lender.”

In your situation it may be possible to avoid the issue of roommates and boarders. If you have a property with a separate unit then you have a “duplex” with one owner-occupied unit and one rental unit. A percentage of the rent from a separate unit that's properly documented is generally acceptable to lenders.

Speak with local community housing agencies and lenders - they may be able to point you to a loan programs that will count your rental income and explain how such income should be documented.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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