HomeReady™ loans allow you to use non-borrower income to help you get approved for the loan. While this income is not considered “qualifying” income, it does help your situation if your debt ratio is above the 45% threshold. Lenders consider this income a compensating factor, but just because it is a compensating factor, does not mean it does not need to be verified. Fannie Mae requires that lenders verify this income just as they would verify qualifying income for the borrower or co-borrower in order to count it.
The Exception to the Rule
Standard income used for qualifying purposes on any loan, including the HomeReady™ loan, requires not only proper proof to verify receipt of the income, such as paystubs and W-2s, but also an executed IRS Form 4506 which gives lenders access to your most recent tax transcript to ensure that you are filing taxes for the income you state you receive. The difference with non-borrower income, however, is that IRS Form 4506 is not required. This is simply because the income is not used for qualifying purposes, meaning the non-borrower’s credit is not being used to qualify for the loan. The income the non-borrower claims is strictly for compensating purposes and the lender can evaluate the income accordingly.
How Non-Borrower Income is Verified
Non-borrower income needs to be verified according to the Fannie Mae guidelines. This means that non-borrowers need standard documentation to verify their income. The one thing that does not need to be provided, however, is a verification of employment as the income is only used as an “extra” factor to help the borrower qualify for the loan. The income is strictly used as a way to back up the borrower should he need help in paying the normal monthly expenses.
Credit Verification not Required
The largest difference between borrowers and non-borrowers is the need for credit verification. Borrowers need to qualify for the HomeReady™ loan with their credit score. Like most conventional loans, the HomeReady™ loan has strict credit guidelines. Typically, HomeReady™ loans require a minimum credit score of 620, but some lenders require the score to be even higher. This is because the program was created for borrowers that have good credit, but whose debt ratio is too high to qualify for standard financing. The income used from the non-borrower does not get included in the debt ratio, which is why the credit of the non-borrowers is not required.
Reasons the 4506 is not Required
Typically, lenders execute a 4506 when they need to verify that the income you provide is the income that the IRS sees as well. The cases when this could differ are when borrowers are self-employed or work on commission. These borrowers typically have a large number of write-offs or expenses that decrease their overall income. The lender needs to verify that this is not the case for you in order to ensure that they are using the accurate income for your qualifying purposes. Because the income of the non-borrower is not subjected to these rules as they are only used as an extra layer of protection (kind of like an insurance policy), the write-offs and expenses do not matter.
The IRS Form 4506 is not a bad condition of any loan, but not requiring it for non-borrowers is a perk for those that want to include extended family members or other household members’ income in order to qualify for a loan. The HomeReady™ loan provides the flexibility that is necessary to obtain a loan, enabling renters to become homeowners with the help of people that live with them.