Introduction
This guideline is about how to handle rental income when you’re applying for a home loan through Desktop Underwriter (DU), which is a tool used by lenders to assess loan applications. It covers various situations, including properties you already own and rent out, and properties you’re buying that will generate rental income.
Associated Policies
The rules for figuring out rental income for a loan application are the same, whether the loan is being assessed manually or through DU. This applies to income from renting out investment properties or multi-unit homes where you plan to live in one of the units. There are specific parts of the Fannie Mae guide you can look at for more details on these rules.
Entering Rental Income in DU for Properties that Are Not the Subject Property
When you own other properties that you rent out, you need to include these in your loan application. Here’s how:
Investment Property
For any property you own and rent out, you must figure out the net income (this could be a profit or a loss) each property brings in each month and report this in the loan application. If you break even, you should enter a small amount to show this. If you don’t enter an amount, or if you put $0, DU will use a standard formula to estimate your income from this property, but you can override this estimate if you want to.
Two- to four-unit Principal Residence
If you live in one unit of a multi-unit property and rent out the others, you calculate your rental income in a similar way but don’t reduce this income by your own mortgage payment. DU will use a formula to estimate your rental income if you don’t provide it, but again, you can enter your own calculation. If your total rental income across all properties is a positive number, it will be added to your income. If it’s negative, it will be counted as a debt.
Conversion of Principal Residence to Investment Property
If you’re buying a new home to live in and turning your current home into a rental property, you must list your current home as a rental in the loan application. You can also include the expected rental income you’ll get from this property to help qualify for the loan.
Entering Rental Income in DU for the Subject Property
If you’re buying a property that will generate rental income, here’s how to handle it:
Investment property:
You calculate the net rental income (after expenses). If it’s positive, it counts as income. If it’s negative, it’s considered a debt. If you’re not using this income to qualify for the loan, you need to list the property’s full mortgage payment as a debt.
Two- to four-unit principal residence:
You figure out the rental income without subtracting your mortgage payment. This income is added to your total income, and the mortgage payment is considered a separate debt.
Entry in the Loan Application
How to enter rental income in the loan application depends on whether you already own the property or are buying it. For properties you own, include them in Section 3 and calculate the net rental income. For properties you’re buying, the expected rental income goes in Section 4c, and you also need to calculate the net income.
Note: Income from renting out part of your home or from a multi-unit property you live in is acceptable for certain loans, and you enter this income differently in the application.
Documentation of Rental Income
The documents you need to provide for rental income depend on how this income is used in your loan application. If your loan qualification includes the rental income, you’ll need to provide specific documents. If you’re including the full mortgage payment for a rental property as a debt and not using the income to qualify, you don’t need to provide income documents, but you still need to document the expected rent for lender reporting purposes.
Recent Related Announcements
There have been some updates related to rental income policies. For the latest information, refer to the most recent announcements from Fannie Mae.
References
For more details, visit Income from Rental Property in DU of the Fannie Mae Selling Guide.