Home Loan Based on Rental Income: The 75% Rule and Qualifying Documents

A home loan based on rental income works like this: the lender takes 75 percent of the gross monthly rent, subtracts the property’s full housing payment, and either adds the leftover to your qualifying income or counts the shortfall as a monthly debt. Whether that rental income actually boosts your buying power, or only cancels out the new property’s own payment, depends on your property management experience and the loan program you choose.

The 75 Percent Rule and the Math

Every major loan program discounts gross rent before using it. Fannie Mae and Freddie Mac both multiply the gross monthly rent by 75 percent, assuming 25 percent will be lost to vacancies and maintenance over time.¹²

From that adjusted rent, the lender subtracts the property’s full monthly housing cost, known as PITIA: principal, interest, taxes, insurance, and any homeowners association dues. Two outcomes are possible:

If the adjusted rent is higher than PITIA, the surplus is net rental income and gets added to your qualifying income.
If PITIA is higher than the adjusted rent, the shortfall is a net rental loss and gets added to your monthly debts.¹

A quick example. You’re buying a duplex and the non-owner unit will rent for $2,000 a month. The lender credits $1,500 (75 percent of $2,000). If the full PITIA on the property is $2,800, you have a $1,300 net rental loss added to your monthly debts. If PITIA is only $1,200, you have $300 in net rental income added to your qualifying side.

Why Property Management Experience Matters

This is where first-time rental buyers often get surprised. Both Fannie Mae and Freddie Mac limit how much rental income you can use based on whether you have a documented track record as a landlord.

Fannie Mae wants to see rental income on Schedule E of your tax returns with 365 Fair Rental Days, or supplementary documentation like a signed lease if the property was in service for at least a year but Fair Rental Days are lower. For short-term rentals where Fair Rental Days fall below 365 each year, two years of tax returns showing rental income can establish the history.¹ Freddie Mac draws the line at one year of investment property management experience.²

Without that experience, the restrictions on a Fannie Mae loan are significant:

On an investment property, rental income can only offset the PITIA on that property. It cannot add to your overall qualifying income.
On a two-to-four-unit primary residence where you already have a housing payment, rental income cannot exceed the PITIA on the subject property.
On a two-to-four-unit primary residence where you have no current housing payment, no rental income can be used at all.

The practical effect is the same under both agencies: a first-time landlord won’t get a boost to qualifying income from projected rents. The rental income keeps the new property from dragging down your debt-to-income ratio, but it won’t push you into a higher price range.

Which Rental Income Counts

Lenders split rental income into two broad categories: properties you already own (non-subject properties) and the property you’re buying (the subject property). For properties you already own, the tax returns tell the story. For a property you’re purchasing, lenders use projected rents from either a signed lease or an appraiser’s estimate of market rent.

The common scenarios where rental income helps you qualify:

A two-to-four-unit primary residence where you live in one unit and rent the others. The projected rent from the non-owner-occupied units offsets your mortgage payment.
An investment property you won’t live in, where expected rental income supports your ability to carry the debt.
Existing rental properties you already own, where documented income adds to your overall qualifying income.
A departing residence you’re converting to a rental when you buy a new home. Specific equity and documentation rules apply.

Boarder income, where someone rents a room inside your single-family home, is a different animal. Fannie Mae generally does not count boarder income as qualifying income, with narrow exceptions for borrowers with disabilities who receive rent from a live-in personal assistant and for HomeReady mortgage borrowers.

Documents Lenders Will Ask For

What you provide depends on whether the property has a rental history or you’re projecting future rents.

Properties You Already Rent Out

Plan on two years of federal tax returns with IRS Schedule E, which reports rental income and expenses for each property. Schedule E captures gross rents received along with deductions for repairs, insurance, property taxes, and depreciation.³

When calculating income from Schedule E, lenders add back certain non-cash expenses so you get credit for money that didn’t actually leave your pocket. Depreciation is the big one. Interest, taxes, insurance, and HOA dues reported on Schedule E also get added back, since those costs are already captured in the PITIA calculation.¹ Missing the depreciation add-back is one of the most common mistakes borrowers make when estimating qualifying income on their own. A tax return showing a rental loss can still produce positive cash flow for underwriting purposes once depreciation goes back in.

Properties Being Purchased or Newly Rented

With no rental history on the property, lenders rely on appraisal-based rent estimates or a signed lease. Fannie Mae requires a Single-Family Comparable Rent Schedule (Form 1007) for a one-unit investment property and a Small Residential Income Property Appraisal Report (Form 1025) for a two-to-four-unit property.⁴¹ If an existing lease transfers to you at closing, provide a copy. Freddie Mac accepts either a lease or its own Form 1000 Comparable Rent Schedule when no lease is available.²

Down Payment Rules by Occupancy

Whether you plan to live in the property changes the required down payment dramatically. Under Fannie Mae’s current eligibility matrix:⁵

Owner-occupied two-to-four-unit property: as low as 5 percent down with automated underwriting approval, or 15 percent with manual underwriting.
One-unit investment property: minimum 15 percent down.
Two-to-four-unit investment property: minimum 25 percent down.

The gap is sharp. A buyer purchasing a $400,000 duplex to live in could put down $20,000, while a pure investor buying the same property would need $100,000. That 5 percent owner-occupied option is why buying a small multi-unit property and living in one unit has become such a popular way to start collecting rental income.

Fannie Mae allows debt-to-income ratios up to 50 percent through its automated underwriting system.⁶ Any net rental loss from a property you own counts toward that ratio, so a money-losing rental shrinks your borrowing power on a new purchase.

FHA and VA Rules

FHA loans follow the same 75 percent vacancy adjustment but add a hurdle for three-to-four-unit properties called the self-sufficiency test. Seventy-five percent of the property’s gross rent must be enough to cover the full monthly mortgage payment. If the property can’t pay for itself on paper, the loan doesn’t get approved regardless of your outside income.⁷ The test uses the lesser of actual rent from a lease or fair market rent reported by HUD, which prevents inflated projections. Two-unit properties are exempt, making duplexes the more flexible FHA multi-unit option. FHA down payments for multi-unit properties stay at 3.5 percent with a credit score of 580 or higher.

VA loans let eligible veterans use rental income, with narrower rules than conventional programs. For a departing residence being converted to a rental, the VA allows a rental offset without requiring a lease agreement, but only for the property the borrower is vacating. The property must be marketable with no indication it cannot be rented. VA loans apply the same 75 percent factor to gross rent on investment properties. The headline benefit for multi-unit buyers is the zero-down-payment option on owner-occupied properties up to four units, which lets veterans acquire income-producing real estate with minimal upfront capital.

Short-Term Rental Income

Income from short-term rentals can qualify you for a mortgage, but the bar is higher. Fannie Mae handles short-term rentals within its standard framework. When a property has fewer than 365 Fair Rental Days on Schedule E, meaning it wasn’t rented year-round, the lender can use two years of tax returns to establish that the property was in service and generating income consistently.¹

For properties with established short-term rental history, lenders look at 12 to 24 months of actual booking income documented through bank statements or platform reports. Without that history, some lenders accept third-party market analysis reports that estimate rental potential based on comparable properties, occupancy rates, and seasonal patterns. These projections carry less weight than a documented track record, and not all lenders accept them for conventional loans. If you’re buying specifically to list on a short-term platform, expect tighter scrutiny.

Converting Your Current Home to a Rental

Moving to a new home and renting out the old one is common, and lenders treat the projected income cautiously. Under Fannie Mae guidelines, if you lack property management experience, rental income from the converted home can only offset the PITIA on that property. It won’t add to your qualifying income for the new purchase.¹ Freddie Mac applies the same restriction, requiring at least one year of experience before the full net rental income can be used.²

Say your current mortgage payment is $2,200 a month and you expect to rent the house for $2,500. Without property management experience, the lender won’t let that $300 surplus boost your income. The rental income simply neutralizes the old mortgage so it doesn’t count as a debt against you. You still need enough income from employment or other sources to carry the new mortgage entirely on your own. Borrowers who assume the rental projection will stretch their buying power on the new home often discover at underwriting that it won’t.

1
Fannie Mae. B3-3.8-01, Rental Income
2
Freddie Mac. Single-Family Seller Servicer Guide Section 5306.1 – Rental Income
3
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
4
Fannie Mae. Appraisal Report Forms and Exhibits
5
Fannie Mae. Eligibility Matrix
6
Fannie Mae. Debt-to-Income Ratios
7
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1