Imputed Rental Income and Mortgage Qualification

When a borrower converts their primary residence to a rental property and purchases a new primary home, the rental income from the departing residence can help or hurt qualification depending on how it is documented.

Fannie Mae Rules for Departing Residence Rental Income

Fannie Mae allows rental income from a departing primary residence to offset the PITI payment on that property (reducing the DTI impact) under certain conditions. The borrower must have at least 30% equity in the departing residence, verified by a current appraisal or AVM, and must provide a signed lease agreement for a term of at least 12 months. Without meeting these conditions, the full PITI of the departing residence counts as a debt obligation in the DTI calculation, which can eliminate qualification for the new purchase.

How Income Is Calculated

• ✦Take 75% of the gross monthly rent from the executed lease agreement (25% vacancy and expense haircut per Fannie Mae guidelines)
• ✦Compare that figure against the full PITI of the departing residence
• ✦If the 75% figure exceeds PITI, the net positive rental income may be added to qualifying income
• ✦If the 75% figure is less than PITI, the shortfall is counted as a monthly debt obligation in the back-end DTI
• ✦Freddie Mac uses a similar 75% rule but may require a history of managing rental properties for income to count toward the qualifying income, not just offset

Tax Return Rental Income vs Lease-Based Rental Income

If the borrower has already been renting the departing property for at least 12 months, the rental income from Schedule E of the prior year tax return can be used instead. Line 21 of Schedule E plus depreciation add-back is the standard calculation. Tax return income requires a two-year history; lease-based income requires a current lease and sufficient equity. Know which documentation path fits the borrower's situation before you quote the maximum purchase price.