Wife on mortgage with her parents on a rental duplex blocking FHA loan

[Dave Allen]

Hey BP folks!

First post, been reading and listening for years now. Wonder if anyone has run into the issue I'm having

My wife and her parents went in on a duplex together and the three of them are all on the title and loan.

My wife and I are in escrow on a house in Citrus Heights. The loan we were applying for is an FHA, which stipulates we must provide a signed lease for our half of the duplex (to be newly rented out) but for the other half which the parents "own" (in reality all three are equally owners of the entire property.) we would need to provide proof of rental income on our tax return, however her parents claimed that so we seem to be SOL.

The mortgage is covered, we can rent it out no problem, but the underwriter is saying on paper it looks like she is responsible for the whole duplex and the rent for half of it is unreportable. Is this really going to get us dead in the water? The only options that seem available to us are add the parents to our application, remove either parents or wife from the duplex, or in the future put the rents all in my wife's name which might negatively affect my in-laws.

You guys are my Hail Mary, hoping you can spot a solution I'm missing!