This instrument assesses the capacity of a borrower applying for a mortgage insured by the Federal Housing Administration (FHA) to manage housing expenses, particularly in scenarios involving income from accessory dwelling units or other rental income properties. It determines if the anticipated rental income is sufficient to offset the mortgage payment, property taxes, insurance, and other associated costs. For instance, if a homeowner plans to rent out a basement apartment, this tool helps lenders determine if the rental income will adequately cover the costs of owning the property.
The utilization of such a resource is important because it promotes responsible lending practices and assists in evaluating risk. Historically, lenders have sometimes struggled to accurately assess the stability of income generated from rental properties. This instrument helps to provide a more standardized and objective assessment, thereby reducing the likelihood of borrower default. This, in turn, strengthens the overall health of the housing market and protects both borrowers and lenders.
