What Properties Generate Qualifying Rental Income
Fannie Mae accepts rental income from several property types. For the property you're buying or refinancing, you can use rental income from a duplex, triplex, or fourplex where you'll live in one unit. You can also use income from a single-family investment property or from an accessory dwelling unit (ADU) on your primary residence.
Say you're buying a duplex and plan to live in one unit while renting the other. The rental income from that second unit can help you qualify for the mortgage. The same applies if you own a separate rental property — that income counts toward your qualifying income.
For properties you already own but aren't buying or refinancing, any rental property works. This includes commercial properties, condos, or single-family homes you rent out.
How Lenders Verify Your Rental Income History
The documentation you need depends on whether you have a rental history and what type of transaction you're doing. Lenders want to see that rental income is stable and continuing.
If you've been a landlord for at least a year, your lender will pull your tax returns and look at Schedule E. This form shows your rental income and expenses for each property. The lender will average your annual rental income over 12 months to get your monthly qualifying amount.
For new landlords or properties recently converted to rentals, you'll need current lease agreements. The lease must be fully executed — signed by both you and your tenant. The lender will also require either Form 1007 (for single-family properties) or Form 1025 (for 2-4 unit properties) from your appraiser to confirm the rental rates are reasonable for your market.
Required Documents for Rental Income
- Most recent signed federal tax return including Schedule E (if you have rental history)
- Current fully executed lease agreements
- Form 1007 or Form 1025 from your appraiser
- Bank statements showing rental deposits (for new leases)
- Security deposit and first month's rent documentation (for new agreements)
When You Can Use Lease Agreements Instead of Tax Returns
Fannie Mae allows lenders to use lease agreements in specific situations where tax returns don't tell the full story. This happens more often than you might think.
You're buying a property that comes with existing tenants. The current lease transfers to you at closing, so your tax returns obviously won't show this rental income yet. Your lender can use the lease agreement plus the appraisal forms to calculate your qualifying income.
You recently converted your former primary residence into a rental property. Maybe you moved last year but only started renting your old house six months ago. Your most recent tax return won't reflect this new rental income, so the lender can use your current lease agreement.
Your rental property was out of service for major renovations. If you spent most of last year gutting and renovating a rental property, your Schedule E might show little or no income. Once you have new tenants and a current lease, the lender can use that instead of the tax return data.
How Lenders Calculate Your Qualifying Rental Income
The calculation method depends on your documentation. When using tax returns, lenders average your Schedule E income over 12 months. They add back certain expenses like depreciation, mortgage interest, taxes, and insurance since these don't represent actual cash outflow for qualifying purposes.
When using lease agreements, lenders multiply your gross monthly rent by 75%. This 25% reduction accounts for vacancy periods and ongoing maintenance costs. So if your lease shows $2,000 monthly rent, the lender uses $1,500 as your qualifying rental income.
Here's a concrete example: You own a rental house that generates $24,000 annually according to your Schedule E, after expenses but before adding back depreciation and mortgage interest. You had $3,600 in depreciation and $8,400 in mortgage interest. Your qualifying monthly rental income would be ($24,000 + $3,600 + $8,400) ÷ 12 = $3,000 per month.
Restrictions Based on Your Experience and Housing Situation
Fannie Mae imposes different restrictions depending on whether you currently have a housing payment and whether you have property management experience. These rules exist because inexperienced landlords face higher risks.
Property management experience means you've been a landlord before. Lenders verify this by seeing rental income on your previous tax returns with 365 fair rental days reported on Schedule E. If you're new to being a landlord, you face tighter restrictions.
If you currently pay rent or have a mortgage payment and you have landlord experience, you can use rental income without restrictions. But if you're living rent-free (maybe with family) and you're a first-time landlord, you can't use any rental income to qualify. The logic is that you haven't proven you can manage both rental income and your own housing costs.
For investment properties, first-time landlords can only use rental income to offset that specific property's mortgage payment. The rental income can't boost your overall qualifying income — it just reduces the negative impact of the investment property's debt.
Special Rules for ADU Rental Income
Accessory dwelling units on your primary residence have unique restrictions. You can only use ADU rental income if you're buying the property or doing a limited cash-out refinance. Rate-and-term refinances don't qualify.
The rental income from your ADU is capped at 30% of your total qualifying income. So if your salary, bonuses, and other income total $8,000 monthly, ADU rental income can contribute a maximum of $2,400 to your qualifying income, even if the actual rent is higher.
You can only count income from one ADU, even if your property has multiple accessory units. And like other rental income calculated from lease agreements, lenders use 75% of the gross rent amount.
How Rental Losses Affect Your Qualification
Not all rental properties generate positive cash flow. When your rental expenses exceed your rental income, you have a rental loss that impacts your debt-to-income ratio.
For your primary residence, rental income gets added to your total monthly income, while the full mortgage payment gets added to your monthly obligations. These don't offset each other in the debt-to-income calculation.
For investment properties, the math works differently. If your rental income exceeds the property's mortgage payment, the net positive amount gets added to your qualifying income. If the rental income is less than the mortgage payment, the net loss gets added to your monthly debt obligations.
Say you have an investment property with $1,800 monthly rental income and a $2,200 mortgage payment. That $400 monthly loss gets added to your debt obligations, making it harder to qualify for your new mortgage.
Common Problems That Trip Up Borrowers
Many borrowers assume any rental income automatically helps their mortgage application. The reality is more complex, especially for new landlords or properties with limited rental history.
Schedule E reporting inconsistencies cause frequent problems. If your tax return shows the property was only rented for part of the year, lenders need to understand why. Was it vacant due to tenant turnover, renovations, or because you just started renting it? The explanation determines whether they can annualize the income or need current lease agreements.
First-time landlords often discover they can't use rental income the way they expected. If you're buying your first rental property and don't currently have a housing payment, that rental income can only offset the new property's mortgage — it won't help you qualify for a larger loan amount.
Lease agreement timing creates issues too. If you sign a lease but tenants haven't moved in yet, you need documentation showing the lease terms have taken effect. This means bank statements showing security deposits and first month's rent, not just a signed piece of paper.
Properties owned through partnerships or S corporations require special handling. Even if the business entity receives the rental income, it still counts as self-employment income for you personally. This can complicate the qualification process and may require additional documentation per B3-3.1-09: Other Sources of Income.
References
For the official guidelines, see B3-3.1-08: Rental Income in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
Ineligible Properties
Rental Income from an ADU on the Subject Property
General Requirements for Documenting Rental Income (Subject and Non-Subject Property)
Documenting Rental Income from Subject Property
Documenting Rental Income from Property Other Than the Subject Property
Reconciling Partial or No Rental History on Tax Returns (Schedule E Only)
Calculating Monthly Qualifying Rental Income (or Loss)
Lease Agreements, Form 1007, or Form 1025
Treatment of the Income (or Loss)
Offsetting Monthly Obligations for Rental Property Reported through a Partnership or an S Corporation
Reporting of Gross Monthly Rent
Uniform Appraisal Dataset (UAD) 3.6 Policy
Associated Policies
In conjunction with the policies in this topic, lenders must also comply with, as applicable, but not limited to, the policies in the following:
;
(Continuity of Income);
;
; and
.
Eligible Properties
Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following:
a one-unit principal residence property with an existing accessory dwelling unit (ADU), with rental income from the ADU only,
a two- to four-unit principal residence property in which the borrower occupies one of the units, or
a one- to four-unit investment property.
If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements (it can be documented in accordance with the requirements below).
Ineligible Properties
Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this policy for boarder income and rental income on principal residence properties with accessory units. See
, for boarder income requirements.
Rental Income from an ADU on the Subject Property
Rental income from an existing ADU can be used in qualifying with the following conditions:
one-unit, principal residence only,
rental income from only one ADU allowed,
purchase or limited cash-out refinance transactions, and
qualifying rental income amount from the ADU is limited to 30% of the total qualifying income.
All other documentation and requirements contained within this topic apply.
General Requirements for Documenting Rental Income (Subject and Non-Subject Property)
If a borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the borrower’s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return. If the borrower does not have a history of renting the property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the lender may be justified in using a fully executed current lease agreement. Examples of scenarios that justify the use of a lease agreement are
purchase transactions where there is an existing lease on the property that will transfer to the borrower;
refinance transactions where the borrower purchased the rental property during or subsequent to the last tax return filing;
refinance transactions for a property that experienced significant rental interruptions causing income to not be reported on the most recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income); and
transactions where rental income is being used to qualify for any property placed in service in the current calendar year, for example, when converting a principal residence to an investment property.
When the subject property will generate rental income and it is used for qualifying purposes, one of the following Fannie Mae forms must be used to support the income-earning potential of the property:
For one-unit properties: Single-Family Comparable Rent Schedule (Form 1007) (provided in conjunction with the applicable appraisal report), or
For two- to four-unit properties: Small Residential Income Property Appraisal Report (Form 1025).
Note: The rental payment on the lease must be reflected in U.S. dollars (cannot be in virtual currency).
Documenting Rental Income from Subject Property
The lender must obtain documentation that is used to calculate the monthly rental income for qualifying purposes. The documentation may vary depending on whether the borrower has a history of renting the property, and whether the prior year tax return includes the income.
Does the Borrower Have a History of Receiving Rental Income From the Subject Property?
Refinance
Form 1007 or Form 1025, as applicable, and either
Purchase
Form 1007 or Form 1025, as applicable, and copies of the current lease agreement(s) if transferred to the borrower.
If the property is not currently rented or if the existing lease is not being transferred to the borrower, then lease agreements are not required and Form 1007 or Form 1025 may be used.
If there is a lease on the property that is being transferred to the borrower, see
, for additional information.
Refinance
Form 1007 or Form 1025, as applicable, and copies of the current lease agreement(s).
Note: All references in this table to lease agreements and Form 1007 or Form 1025 must comply with the requirements in Lease Agreements, Form 1007, or Form 1025.
If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. See Reporting of Gross Monthly Rent below for details.
Documenting Rental Income from Property Other Than the Subject Property
When the borrower owns property – other than the subject property – that is rented, the lender must document the monthly gross (and net) rental income with
the borrower’s most recent signed federal income tax return that includes Schedule 1 and Schedule E,
the most recent signed federal business income tax return for a partnership or S corporation, that includes IRS Form 8825 (when only rental income is reported on the K-1), or
both of the above, when rental properties are reported on both personal and business returns.
When ordinary income is also reported on Schedule K-1, along with IRS Form 8825 rental income, all documentation guidelines noted in
or Schedule K-1 Income in apply.
Note: For rental income reported on Schedule E of personal returns, copies of the current lease agreement(s) may be substituted if the borrower can document a qualifying exception. See Reconciling Partial or No Rental History on Tax Returns (Schedule E Only) below and Calculating Monthly Qualifying Rental Income (or Loss).
Reconciling Partial or No Rental History on Tax Returns (Schedule E Only)
When rental income is being used to qualify, the lender must consider whether the income reported on the most recent signed personal federal income tax returns is appropriate to use in underwriting.
To determine qualifying rental income, in those scenarios where the borrower has only a partial rental history on the personal federal tax returns, the lender must determine the period of time the rental property was in service (that is, rented, with the borrower receiving rental income from that property).
If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using one of the following options:
Schedule E income and expenses, and annualizing the income (or loss) calculation, or
fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation.
If ...
Then ...
the property was acquired or placed into service during the most recent tax filing year,
the property was acquired or placed into service subsequent to the most recent tax filing year,
the lender must confirm the purchase date using the settlement statement or other documentation, if applicable.
In addition, for properties recently converted to an investment property or newly placed in service, obtain Schedule E of the most recently filed tax return to confirm no rental income or expenses for this property.
the property was acquired prior to the most recent tax filing year, but the rental property was out of service for an extended period,
the lender determines that some other situation warrants an exception to use a lease agreement,
the lender must provide an explanation and justification in the loan file.
If the borrower is converting a principal residence to an investment property, see
, for guidance in using that rental income to qualify the borrower.
Calculating Monthly Qualifying Rental Income (or Loss)
Rental income must be calculated for each rental property. The amount of rental income that may be used to qualify may be restricted depending on whether the borrower currently has a housing payment and has a history of receiving rental income.
A housing payment is the total monthly expense amount the borrower(s) is currently making for the primary residence occupied by the borrower(s).
A housing payment can only include the following:
rental housing payment,
PITIA payment and/or leasehold payment for mortgaged properties, or
property taxes and/or leasehold payments for non-mortgaged properties.
See
and for additional information.
If not otherwise documented as one of the borrower's existing liabilities, the lender must document the borrower's housing payment. Documentation may include, but is not limited to:
direct verification of rent from a management company,
bank statements reflecting a payment to an organization or individual,
cancelled checks or equivalent, or
evidence of property taxes paid.
The following tables provide restrictions on the amount of rental income that may be used for qualifying purposes based on various borrower and rental income scenarios.
Property Management Experience
Restrictions on Rental Income Used to Qualify
2-4 Unit Primary Residence
Yes
Rental income used in qualifying has no restrictions
No
Rental income used in qualifying may not exceed the PITIA
NA
No rental income can be used in qualifying
1 Unit Primary Residence with ADU
Yes
Rental income used in qualifying is limited to 30% of the total qualifying income
No
Rental income used in qualifying is limited to 30% of the total qualifying income and cannot exceed PITIA
NA
No rental income can be used in qualifying
1-4 Unit Investment Property
Yes
Rental income used in qualifying has no restrictions
No
Rental income can only be used to offset the PITIA of the related property
NA
No rental income can be used in qualifying
Property Management Experience
Restrictions on Rental Income Used to Qualify
2-4 Unit Primary Residence
Yes
Rental income used in qualifying has no restrictions
No
Rental income used in qualifying may not exceed the PITIA
1-4 Unit Investment Property - new or newly placed in service (includes departing residence)
Yes
Rental income used in qualifying has no restrictions
No
Rental income can only be used to offset the PITIA of the related property
NA
No rental income can be used in qualifying
1-4 Unit Investment Property - existing rental (one year of receiving rental income)
Yes
Rental income used in qualifying has no restrictions
No
See Treatment of the Income (or Loss) below for how to apply rental income.
Note: Rental income reported on IRS Form 8825 of federal business tax returns is reported as self-employment income.
The lender must establish a history of property management experience by obtaining one of the following:
The borrower’s most recent signed federal income tax return, including Schedules 1 and E. Schedule E should reflect rental income received for any property and Fair Rental Days of 365;
If the property has been owned for at least one year, but there are less than 365 Fair Rental Days on Schedule E
a current signed lease agreement may be used to supplement the federal income tax return; or
two years of the most recent federal income tax returns reflecting rental income received may be obtained to document that the property was in service for the full year (for example: a short-term rental income for more than one year, but the fair rental days are less than 365 in each year).
A current signed lease may be used to supplement a federal income tax return if the property was out of service for any time period in the prior year. Schedule E must support this by reflecting a reduced number of days in use and related repair costs.
See Lease Agreements, Form 1007, or Form 1025 below for further information.
Method for Calculating the Income
The method for calculating rental income (or loss) for qualifying purposes is dependent upon the documentation that is being used (that is, Schedule E or a current fully executed lease agreement). The following table provide examples of different methods.
If the supporting document is...
And the property was in service...
The lender must...
federal tax returns, Schedule E
for a full or partial year
average the annual rental income or loss over 12 months.
a current fully executed lease agreement supporting monthly rental amount, and federal tax returns, including Schedule E
less than the full year, and the borrower qualifies for a documented exception to use a lease agreement to support monthly rental income
average the rental income (or loss) over the number of months the borrower used the property as a rental unit.
When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly.
See General Requirements for Documenting Rental Income (Subject and Non-Subject Property), Reconciling Partial or No Rental History on Tax Returns (Schedule E Only) and Treatment of the Income (or Loss) for further instructions.
Lease Agreements, Form 1007, or Form 1025
When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as "Monthly Market Rent" on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.
When using a lease agreement, the lease agreement amount must be supported by
Form 1007 or Form 1025, as applicable, or
evidence the terms of the lease have gone into effect. Evidence must include a minimum of:
two months consecutive bank statements or electronic transfers of rental payments for existing lease agreements, or
copies of the security deposit and first full month's rent check with proof of deposit for newly executed agreements.
See Treatment of the Income (or Loss) below for further instructions.
Treatment of the Income (or Loss)
The treatment and amount of monthly qualifying rental income (described above in Calculating Monthly Qualifying Rental Income (or Loss)) used in the calculation of the borrower's total debt-to-income ratio — varies depending on whether the borrower occupies the rental property as their principal residence.
If the rental income relates to the borrower’s principal residence:
The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITIA of the property.)
The full amount of the mortgage payment (PITIA) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.
If the rental income (or loss) relates to a property other than the borrower's principal residence:
If the monthly qualifying rental income minus the full PITIA is positive, it must be added to the borrower’s total monthly income (subject to the limits in Calculating Monthly Qualifying Rental Income (or Loss)).
If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations.
The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.
Note: When a borrower owns multiple rental properties, the rental income for all non-subject properties is first calculated for each property, then aggregated. The aggregate total of the income (or loss) is then added to the borrower's total monthly income or included in their monthly obligations, as applicable.
Offsetting Monthly Obligations for Rental Property Reported through a Partnership or an S Corporation
If gross rents and related expenses are reported through a partnership or S corporation, then any rental income (or loss) must be evaluated as self-employment income regardless of the borrower's percentage of ownership interest or whether the borrower is personally obligated on the mortgage debt. However, if the related property is reported on the most recent federal business tax return and it's clear the business is responsible for the payment, the full PITIA can be excluded from the DTI calculation.
When rental property is reported through a partnership or an S corporation, but the borrower is personally obligated on the mortgage, the property must be included in the count of financed properties and is subject to the requirements for multiple financed properties as indicated in
.
See also
and .
Rental Income Calculation Tools
Fannie Mae publishes worksheets that lenders may use to calculate rental income. The Income Calculator may also be used to calculate certain rental income. Use of Income Calculator or these worksheets is optional. The worksheets are:
Rental Income Worksheet – Principal Residence, 2– to 4–unit Property (Form 1037),
Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 4 properties) (Form 1038),
Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 10 properties) (Form 1038A).
See
, for additional information.
Reporting of Gross Monthly Rent
Eligible rents on the subject property (gross monthly rent) must be reported to Fannie Mae in the loan delivery data for all two- to four-unit principal residence properties and investment properties, regardless of whether the borrower is using rental income to qualify for the loan. If the borrower is using rental income from the subject property to qualify for the loan, all of the applicable requirements above must be followed to document and calculate the income.
If the borrower is not using any rental income from the subject property to qualify, gross monthly rent must be documented only for lender reporting purposes. The borrower can provide one of the sources listed above, or may provide one of the following sources (listed in order of preference):
the appraisal report for a one-unit investment property or two- to four-unit property, or Single-Family Comparable Rent Schedule (Form 1007), provided neither the applicable appraisal nor Form 1007 is dated 12 months or more prior to the date of the note;
if the property is not currently rented, the lender may use the opinion of market rents provided by the appraiser; or
if an appraisal or Form 1007 is not required for the transaction, the lender may rely upon either a signed lease from the borrower or may obtain a statement from the borrower of the gross monthly rent being charged (or to be charged) for the property. The monthly rental amounts must be stated separately for each unit in a two- to four-unit property. The disclosure from the borrower must be in the form of one of the following:
a written statement from the borrower, or
an addition to the Form 1003.
The lender must retain the documentation in the loan file that was relied upon to determine the amount of eligible rent reported.
Uniform Appraisal Dataset (UAD) 3.6 Policy
Lenders using UAD 3.6 must follow the requirements in the .
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