FHA lets you count rental income from a departing residence only when your new home is more than 100 miles from the one you’re leaving. Under that threshold, the full mortgage payment on the old house counts as a debt against you, with no rental offset. Above it, the lender uses 75 percent of the lease or appraised market rent, subtracts the full mortgage payment on the departing home, and adds a positive result to your qualifying income or a negative one to your monthly liabilities.1HUD. FHA Single Family Housing Policy Handbook
The 100-Mile Distance Rule
HUD’s Single Family Housing Policy Handbook sets one firm geographic condition on this: your new primary residence must be more than 100 miles from the property you’re vacating.1HUD. FHA Single Family Housing Policy Handbook The reason for the move does not have to be a job transfer, but the distance is not negotiable. Ninety-five miles will not do.
If you fall short of the threshold, the lender still has to account for the departing home. The full monthly payment on that property — principal, interest, taxes, and insurance — is added to your debts on the new application. You just can’t put any projected rent against it.
Documents the Lender Will Require
Clearing the mileage rule doesn’t automatically get the rental income credited. The handbook requires three specific items before the lender can use it: a fully executed lease running at least one year beyond the closing date of the new mortgage, evidence that the tenant has actually paid a security deposit or the first month’s rent, and an appraisal that includes a rental income analysis.1HUD. FHA Single Family Housing Policy Handbook
The lease has to be signed by both you and the tenant. A month-to-month arrangement will not qualify. For the payment evidence, underwriters typically want to see a copy of the tenant’s check together with a bank statement showing the deposit hitting your account. This paper trail is meant to show the lease is a real transaction, not one drawn up to prop up the loan file.
The appraisal form depends on the property type. For a single-family home, the lender orders a standard appraisal (Fannie Mae Form 1004 / Freddie Mac Form 70) along with a separate rent schedule (Fannie Mae Form 1007 / Freddie Mac Form 1000) that estimates fair market rent from comparable rentals. For a two-to-four-unit property, the small residential income property appraisal (Fannie Mae Form 1025 / Freddie Mac Form 72) is used instead.1HUD. FHA Single Family Housing Policy Handbook
If the home has already been rented in a prior tax year, the documentation shifts. Instead of an appraisal-based rent estimate, the lender uses your last two years of tax returns with Schedule E to verify what you actually collected.
How the Rental Income Is Calculated
Two calculation paths exist, and which one applies turns on whether the property has a rental history.
No Prior Rental History
When the property has never been rented, the lender takes 75 percent of the lower of two figures: the fair market rent from the appraisal or the rent stated in your lease. The remaining 25 percent is treated as absorbed by vacancy and maintenance. From that 75 percent figure, the lender then subtracts the full monthly mortgage payment on the departing home, including taxes and insurance.1HUD. FHA Single Family Housing Policy Handbook
Say the appraiser estimates market rent at $2,000 and your lease is written at $1,900. The lender uses $1,900. Seventy-five percent of that is $1,425. If the departing home’s monthly payment with taxes and insurance is $1,200, you end up with positive $225 added to your qualifying income. If the payment were $1,600, you’d end up with negative $175, and that shortfall would be counted as an extra monthly debt.
Established Rental History
If you already have rental income reported on Schedule E, the lender averages the net rental income over the last two years. Depreciation, mortgage interest, taxes, insurance, and homeowners association dues that were deducted on Schedule E can be added back, since depreciation is a non-cash deduction and the other items are already inside the mortgage payment the lender is using elsewhere. If you’ve owned the property for less than two years, the lender annualizes the income over the period of ownership.1HUD. FHA Single Family Housing Policy Handbook
Positive and Negative Results
The sign of the number matters. A positive net rental figure is added to your effective income and helps you qualify. A negative figure, where the mortgage payment exceeds the adjusted rental income, is stacked onto your monthly liabilities.1HUD. FHA Single Family Housing Policy Handbook There’s no option to simply set the departing residence aside. If you own it, it will be counted in one direction or the other.
Three- and Four-Unit Properties: The Self-Sufficiency Test
If the home you’re leaving is a three-unit or four-unit property, an extra rule applies. The self-sufficiency test requires that the total monthly mortgage payment not exceed the net rental income from all units, including the one you currently occupy. Net rental income for this test is the appraiser’s estimated fair market rent for every unit, minus the greater of the appraiser’s vacancy-and-maintenance estimate or 25 percent of gross rent.1HUD. FHA Single Family Housing Policy Handbook
A property that fails this test cannot support its own mortgage in FHA’s calculation, and the loan amount on it would have to come down for it to qualify. As a practical matter, a departing three- or four-unit building that doesn’t clear the test may block you from counting any of its rental income against the new mortgage.
Do You Also Need a Second FHA Loan Exception?
The rental income rule and the one-FHA-loan-at-a-time rule are separate, and both may apply to the same borrower. FHA generally limits you to a single FHA-insured mortgage, and keeping the old loan while getting a new one requires qualifying for an exception. Relocating more than 100 miles for employment is one such exception. Others include an increase in family size (with a loan-to-value ratio of 75 percent or less on the current home, based on a current appraisal), vacating a home that a co-borrower will continue to occupy, and non-occupying co-borrower situations.2U.S. Department of Housing and Urban Development. Can a Person Have More Than One FHA Loan
Meeting a second-loan exception does not by itself let you count rental income. A borrower who qualifies for a second FHA loan under the family-size increase, but is moving only 30 miles, still cannot use rental income from the old home to offset its mortgage payment.2U.S. Department of Housing and Urban Development. Can a Person Have More Than One FHA Loan The 100-mile rule is its own gate.
If You’re Moving Less Than 100 Miles
When the distance rule shuts the door on rental income, the departing home’s full payment lands on your debt side, and the numbers on the new application often stop working. Borrowers in that position typically have to pay off the existing FHA loan before closing on the new one, refinance the departing home into a conventional loan, or make a larger down payment on the new property to bring the qualifying payment down. FHA’s back-end debt-to-income ratio is generally capped at 43 percent, though automated underwriting can approve stronger files up to roughly 50 to 57 percent, which is the room you’re working within when both mortgage payments have to fit.