Applying for FHA mortgage when living together but only one will be on the mortgage, no savings

Question

Trying to get some info for a friend here. She's looking at getting a mortgage - her BF of many years can't join her on a joint so it'll just be her.

Am I correct in assuming that all their monthly bills will be counted just against her income, or is it possible that the mortgage company will allow his income to count in helping pay the bills?

She's going for a FHA mortgage.

If it's the former, would it help her if she got her BF to pay rent with a formal agreement (dunno if he'd even go for that since I barely know the guy)?

(Some of this extra info is also contained in the comments below)

In terms of savings it sounds like he's got about $7K cash, she has virtually nothing. His credit score is too low to be approved for a mortgage so it'll all be on her.

Also - more to add: She's only recently taken her student loans out of forbearance and she's taking the view that, as long as her mortgage + tax + PMI is broadly the same as her rent, she's good to go. Both vehicles are old and will need replacing in the not too distant future and she's only had her current job for about a year.

Answer 1

Has she talked to a banker? That would be a great place to start.

Please understand that this is a hot mess in the making and as her friend, you should help her navigate through it. It is better that either she, on her own, or he on his own, buy the property. It should be communicated that the party not buying the home will have no financial interest in the home but would expect to contribute to the costs. This is the case anytime a person rents a home, they pay rent but do not experience the benefits or pains of owning the property.

Any bills in her name will count against her income to debt ratio. Bills exclusively in his name will not. These metrics are independent of who actually pays the bills. For example he might pay her car payment in lieu of rent. She would still have to count her car payment as part of her debt.

While long time boyfriend/girlfriend relationships may feel like a marriage, the courts do not agree. When a married couple buys a home joint ownership is granted (in most states) even if only one is on the mortgage. Single couples do not enjoy that same grant, and there can be some very hurt feelings when one learns that they have no interest in a property after a painful breakup or even death.

Answer 2

This is of course a disaster waiting to happen, and it's doubtful you will have the influence to do anything about it unfortunately (if they've been together for 15 years and yet you barely know him). Hopefully they simply won't qualify and the problem solves itself.

To directly answer your question though:

If this was a multifamily home, or an investment property, a formal rent agreement would potentially allow you to use some percentage (up to 85% of the fair market rent I believe) of that rental income as her income. I'm not sure if there are restrictions on the relationship between the renter and the rentee -- which is to say I'm not sure if the rental income can come from a significant other or not.

However, I'm guessing it is neither of those things and she is instead buying a single family home she intends to have as her primary residence. In that case none of his income can be included for calculation of the debt to income ratio.

There are also gifting rules which determine where you can get the money for the down payment from. Depending on the circumstances of her credit score and so on it may be technically against the rules of the FHA loan to use his money for the downpayment as well. But at least in the pre-mortgage crisis days no one looked at where the money was coming from too closely, I'm not sure how stringent everything is today.

EDIT::

She should also realize that given how the economy works today, the flexibility renting provides is an enormous benefit that really should be translated into real dollars. Home ownership got such prominence in the baby boomers generation because buying makes a hell of a lot more sense when you expect to stay at one job for your entire career and aren't expecting to move for decades, if ever. It relates to my next point on amortization.

I also wanted to add something about amortization because loan officers take advantage of the fact that most people have no idea how they work. If she were to buy a $165,000 home on a 30 year FHA mortgage, she will be paying about $840 per month. But here's the thing: most people don't hold on to a 30 year mortgage for 30 years. It's more like 5-10 and probably closer to 5. This matters because it turns the whole "renting is throwing away your money" thing into a huge falsehood. Out of that $840, only about $220 is paying the principal and the rest is interest. You don't start paying more towards loan principal than interest until 15 years into the loan!

So lets say after 7 years you decide to upgrade, or move to a new city, or whatever. You would have paid about $70,000 and nearly $49,000 of it went straight to interest payments!

Talking about it from this approach might be more effective if you are hoping to dissuade -- the numbers people use when comparing buying vs renting are very often hugely massaged in favor of buying and don't take a lot of things into account (see also my comment on repair costs).

Answer 3

The best security is in marriage. Then it's much easier to file jointly and have both of their incomes counted. Building up or repairing good credit may also be necessary. There are many very good reasons why financial institutions have respect for the stability and security that marriage provide. If the underwriters aren't comfortable with it, neither should your friends be comfortable with a needlessly risky living arrangement. Underwriters (those that don't accept subsidies, anyway) have to be accurate or their company goes under, so that's an important signal to pay attention to.