How DU Handles Rental Income Calculations
Desktop Underwriter takes a systematic approach to rental income that differs depending on whether you already own the property or are buying it. The system automatically calculates net rental income unless your lender enters a specific amount.
For investment properties you already own, DU uses this formula: gross rental income multiplied by 75%, then subtracts the full PITIA payment (principal, interest, taxes, insurance, and association dues). Say you own a rental that brings in $2,000 monthly. DU calculates $1,500 (75% of $2,000) minus your $1,200 PITIA payment, giving you $300 in qualifying rental income.
For a two- to four-unit property where you live in one unit, the calculation is simpler. DU takes 75% of the gross rental income from the other units without subtracting your mortgage payment. Your mortgage payment still counts as a debt, but it doesn't reduce the rental income calculation.
Where to Enter Rental Income in Your Loan Application
The location depends on your situation. For properties you already own, you enter them in Section 3 of the loan application along with the existing mortgage information. Your lender then calculates and enters the net monthly rental income.
For a property you're purchasing as an investment, you enter the expected monthly rental income in Section 4c. Your lender must calculate the expected net monthly rental income based on the projected rent and expenses.
If you're buying a new primary residence and converting your current home to a rental, you mark your current property as "Retained" for status and "Investment" for intended occupancy in Section 3. You can include the expected rental income from this conversion in your qualifying ratios.
When Rental Income Becomes a Liability
Not all rental properties help your debt-to-income ratio. If your net rental income calculation results in a negative number, DU treats that loss as additional debt rather than income.
This happens when your property expenses exceed 75% of the gross rent. Using the earlier example, if your rental brings in $2,000 monthly but your PITIA payment is $1,800, you'd have a negative $300 ($1,500 minus $1,800). DU adds this $300 to your monthly debt obligations.
For investment properties where you choose not to use rental income for qualifying, your lender must enter the entire PITIA payment as a negative amount. This ensures DU accounts for the full property expense without giving you credit for any rental income.
Documentation Requirements You'll Need
The documentation requirements follow the same rules as manually underwritten loans, detailed in B3-3.1-08: Rental Income. This typically includes lease agreements, tax returns showing rental income, and property management statements if applicable.
However, there's one exception. If your debt-to-income ratio includes the full rental property payment and you're not using the rental income for qualifying, you don't need to provide rental income documentation. But your lender still needs gross monthly rent documentation for reporting purposes.
For properties you're purchasing, you'll need a lease agreement or market rent analysis to support the expected rental income amount. Your lender will verify that the projected rent is reasonable for the area and property type.
Special Considerations for Multi-Unit Primary Residences
If you're buying a duplex, triplex, or fourplex as your primary residence, the rental income rules work in your favor. DU doesn't subtract your mortgage payment from the rental income calculation since you're living in one of the units.
For HomeReady loans specifically, you can even count income from an accessory unit (like a basement apartment) in a single-family home. This income gets entered in Section 1e under "Income from Other Sources" rather than the rental income sections.
The key difference is that your mortgage payment always remains a liability in your debt-to-income ratio, but the rental income from the other units gets added to your qualifying income without reduction.
Common Pitfalls with DU Rental Income Entry
One frequent mistake is entering $0.00 for net monthly rental income when you mean to indicate break-even cash flow. DU interprets $0.00 as "calculate it for me" and will apply its standard formula. If you truly have break-even cash flow, enter either $0.01 or -$0.01 to override DU's calculation.
Another issue arises when lenders forget to account for vacancy and maintenance costs. While DU's 75% factor provides some cushion, it may not reflect the actual expenses for properties in certain markets or condition. Your lender can override DU's calculation with a more accurate net income figure based on actual operating history.
For properties you're converting from primary residence to rental, make sure your lender properly identifies the property status in DU. The system needs to know this is a retained property becoming an investment to calculate the rental income correctly.
References
For the official guidelines, see B3-3.5-02: Income from Rental Property in DU in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B3-3.5-02, Income from Rental Property in DU (06/01/2022)
Associated Policies
Entering Rental Income in DU for Properties that Are Not the Subject Property
Conversion of Principal Residence to Investment Property
Entering Rental Income in DU for the Subject Property
Associated Policies
The documentation, calculation, and other requirements that pertain to rental income on an investment property or two- to four-unit principal residence are the same for loans underwritten through DU as they are for manually underwritten loans. See B3-3.1-08, Rental Income, and B3-6-06, Qualifying Impact of Other Real Estate Owned, for additional information.
Entering Rental Income in DU for Properties that Are Not the Subject Property
Properties already owned by the borrower must be entered in Section 3 along with the related existing mortgage loan(s). The following rental income policies apply to properties that are not the subject property. For rental income policies on the subject property, see Entering Rental Income in DU for the Subject Property below.
Investment Property
When submitting rental income to DU for an investment property:
The lender should calculate the net rental income amount for each property and enter the amount (either positive or negative) in the Net Monthly Rental Income in Section 3.
If the Net Monthly Rental Income is a “breakeven” amount, the user must enter either $0.01 or $-0.01.
If Net Monthly Rental Income is not entered or is $0.00, DU will calculate it using this formula:
(Gross rental income multiplied by 75%) minus property PITIA expense
The lender can override DU’s calculation by entering the Net Monthly Rental Income amount in Section 3.
Two- to four-unit Principal Residence
When submitting rental income to DU for the borrower’s principal residence that is a two- to four-unit property:
The lender should calculate the net rental income amount for the property and enter the amount in Net Monthly Rental Income in Section 3.
The net rental income calculation is not reduced by the mortgage payment, which is always treated as a liability and included in the debt-to-income ratio.
If Net Monthly Rental Income is not entered or is $0.00, DU will calculate it using this formula:
Gross rental income multiplied by 75%
The lender can override DU’s calculation by entering the Net Monthly Rental Income amount in Section 3.
If the combined total Net Monthly Rental Income for all properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the debt-to-income ratio.
Refer to the Desktop Underwriter Job Aids (Troubleshooting - DTI Ratio Calculations Questions) for additional details on entry of real estate and rental income.
Conversion of Principal Residence to Investment Property
If the borrower is purchasing a principal residence and is retaining their current residence as a rental property, the current principal residence must be identified in Section 3 by entering Retained (Status field) and Investment (Intended Occupancy field).
Net rental income to be earned on the property may also be entered and used to qualify in accordance with the above requirements.
Entering Rental Income in DU for the Subject Property
The following rental income policies apply to properties that are the subject property. Refer to B3-3.1-08, Rental Income to determine the maximum amount of rental income that can be used for qualifying purposes for the subject property.
Investment property: Calculate the net rental income using the PITIA. If it is positive, it will be added to qualifying income. If it is negative, enter a negative value. DU treats the loss as a liability and includes it in the debt-to-income ratio. If income from the subject property is not used for qualifying purposes, the lender should enter the entire proposed PITIA as a negative amount.
Two- to four-unit principal residence: Calculate the net rental income without subtracting the proposed PITIA. Net rental income will be added to qualifying income. The PITIA will be included in the debt-to-income ratio.
Entry in the Loan Application
Rental income for the subject property must be entered as follows:
For a property already owned by the borrower: The borrower enters the property in Section 3 and the lender must calculate and enter the net rental income in Net Monthly Rental Income.
For a property the borrower is purchasing: The borrower enters Expected Monthly Rental Income in Section 4c and the lender must calculate and enter the net rental income in Expected Net Monthly Rental Income.
If income from an investment property is not included in the qualifying ratios, the lender must enter the entire proposed PITIA as a negative amount in Section 3 or 4c as applicable.
Note: Rental income from a one-unit principal residence with an accessory unit or from a two- to four-unit principal residence is an acceptable source of qualifying income on HomeReady loans. Enter Accessory Unit Income in Section 1e. Income from Other Sources in the online loan application.
Documentation of Rental Income
Refer to B3-3.1-08, Rental Income for the applicable documentation requirements. If the debt-to-income ratio includes the entire rental property payment and income from the property is not used in qualifying, rental income documentation is not required. However, documentation of gross monthly rent for the subject property is required for lender reporting purposes. See Reporting of Gross Monthly Rent in B3-3.1-08, Rental Income, for additional information.
