Determining Rental Income for a Conforming Mortgage

Recently Fannie Mae updated their guidelines for rental income, including the addition of Rental Income Worksheets for the lender to complete to help make sure the rental income is calculated correctly. How much rental income may be used and how it is calculated will depend on when the borrower obtained the rental property, when rents were collected and what how many units there are with the subject property. Underwriters are looking the likelihood that the rental income will continue as well as the losses too. If your rental is producing a net loss, that will factored into your qualifying ratios.

Here are some basic guidelines for determining rental income.

 Calculating rental income when the property is being purchased.

• If the property is leased, then copies of the current signed lease agreements may be required.
• If the property is not currently leased, then the lender may use “market rent” information provided by the appraiser.
• When there is no rental income for the subject property on the borrowers tax returns, the rental income will be reduced to 75% of the gross rental income provided on the lease.

Calculating rental income when the subject property is being refinanced.

• Copies of the fully executed lease agreements must be provided (assuming the home is currently rented).
• If the borrower owned the property during the previous year, they will need to provide tax returns. The lender will use the information provided on Schedule E to determine the net rental income/loss.
• If the property was rented for a portion of the previous year, the lender will still need to provide a copy of the tax returns, including Schedule E. The borrower will also need to explain (and document) why the home was not rented for the full year.  For example, was the home recently purchased or out of service to be renovated.
• Rental income will be averaged based on the months the home was in service the previous year.
• The lender may also rely on “market rent” data from the appraisal.

What if you’re converting your existing home into a rental to buy another home?

• If the home being converted has less than 30% equity, as determined by an appraisal ordered by the lender, then no rental credit may be used. The borrower will need to qualify for both mortgage payments.
• If the home being covered has at least 30% equity, the rental income may be used if you can provide:
  • fully executed lease agreement;
  • proof of security deposit from the tenant (cancelled check); and
  • bank statement showing the deposited security deposit.

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