How to Calculate Rental Income to Qualify for a Mortgage

To calculate rental income to qualify for a mortgage, a lender multiplies your gross monthly rent by 75%, then subtracts the full monthly housing payment on that property — principal, interest, taxes, insurance, and any association dues, together called PITIA. A positive result is added to your qualifying income. A negative result is treated as a monthly debt. The 25% that gets stripped off the top is a built-in cushion for vacancies, repairs, and the other costs that eat into rent checks.¹

Fannie Mae and Freddie Mac both use the 75% figure, and both describe the deduction the same way.² What changes from one borrower to the next is where the gross rent number comes from. If the property already appears on your tax returns, the lender uses Schedule E. If it doesn’t, the lender uses a signed lease and an appraisal-based rent estimate.

When the Property Is Already on Your Taxes

For a property you’ve rented long enough to report on a federal return, the calculation starts with IRS Form 1040, Schedule E, which reports income and expenses from rental real estate.³ The lender takes the net income or loss shown there and adds back several items the IRS lets you deduct that either don’t represent cash leaving your account each month or are already captured elsewhere in the calculation.

Those add-backs are depreciation, mortgage interest, property taxes, insurance, homeowners association dues, and any one-time extraordinary expenses such as a casualty loss.⁴ Mortgage interest, taxes, insurance, and dues come back in because the lender subtracts the full PITIA in a separate step and would otherwise be counting those costs twice. Depreciation comes back in because it’s a paper deduction.

After the add-backs, the lender divides by the number of months the property was in service to get a monthly figure. Most lenders average the last two years of returns to smooth out year-to-year swings.

When the Property Has No Tax History Yet

For a property that hasn’t been on a return — a recent purchase, a new conversion, or a first lease — the lender takes the gross monthly rent from a signed lease agreement or from the fair market rent on an appraisal form and multiplies by 75%.¹

The appraisal piece is a specific form. One-unit investment properties use Fannie Mae Form 1007, the Single-Family Comparable Rent Schedule. Two-to-four-unit properties use Form 1025.⁵ Each gives the lender an independent market rent estimate drawn from comparable properties nearby.

If the lease rent sits well above what the appraisal says the market will support, expect friction. Freddie Mac requires lenders to check whether market rents reasonably support the lease amount, and if they don’t, the lender has to document why the lease figure is still reliable.² In practice, the more conservative of the two numbers tends to win.

Proof the lease is real matters too. You’ll generally need at least two consecutive months of bank statements showing rental deposits. For a newly signed lease, proof of the security deposit and first month’s rent will do, and the first rental payment has to be due no later than your first mortgage payment date.²

Renting Out Your Current Home to Buy a New One

Moving out of your current home, renting it, and buying a new primary residence is a common scenario with its own rules. The departing property has no rental track record, so Schedule E isn’t available. You’ll produce a fully executed lease and the appropriate appraisal form (1007 or 1025), and the lender applies the 75% factor to the gross rent.

The catch is a restriction table tied to your landlord experience and your current housing payment. If you already carry a mortgage on the departing residence and you have at least one year of property management experience, there’s no restriction on using the rental income to qualify. Without that experience, the rental income can only offset the PITIA on the departing residence; it won’t add anything to your qualifying income. If you have neither a current housing payment history nor management experience, the lender won’t count the rental income at all.¹ First-time landlords tend to hit this wall hardest, because the lease alone doesn’t carry them.

Living in One Unit of a 2-4 Unit Property

Buying a duplex, triplex, or fourplex and living in one unit while renting the rest changes the arithmetic in your favor. The lender takes 75% of the gross rent from the units you don’t occupy, using Form 1025, but does not subtract the mortgage payment from the rental income figure. Instead, the full PITIA goes into your housing expense on one side of your ratio, and the net rental income gets added to your qualifying income on the other.⁴ The mortgage payment counts once, as your primary housing cost.

The same experience restrictions apply. If you’ve never managed rental property and don’t have a current housing payment you’re keeping, the rent from the other units won’t count toward qualifying you at all.¹

Why Property Management Experience Keeps Coming Up

Both Fannie Mae and Freddie Mac treat landlord experience as a gating factor. Freddie Mac is explicit: to use the full net rental income from a 1-to-4-unit investment property, at least one borrower must have a minimum of one year of investment property management experience. Without that year, the net rental income can only offset the subject property’s PITIA and related costs.²

To document the experience, lenders look for a Schedule E showing the property in service for a full year — 365 fair rental days. If your Schedule E shows fewer days, which is common with short-term or seasonal rentals, a current signed lease can supplement the return. Two years of tax returns showing rental income across both years is another way to establish the history.¹

FHA Loans on 3-4 Unit Properties

If you’re using an FHA loan to buy a three- or four-unit property, there’s an added test: self-sufficiency. The property’s net rental income must cover at least 100% of the PITI payment. The building has to pay for itself.⁶ FHA calculates net rental income by taking 75% of gross rents, or the appraiser’s vacancy factor if it’s higher than 25%, and then checking whether the result clears the monthly mortgage obligation.

In high-cost markets, prices often push the payment above what local rents can support, and the loan gets denied no matter how strong the borrower’s personal income looks. This test only applies to FHA loans on three- and four-unit properties; it doesn’t apply to one- or two-unit FHA purchases or to conventional loans at all.

Documents to Gather

What you’ll need to assemble depends on your situation, but the core pieces are:

IRS Form 1040, Schedule E for the most recent one or two years, signed, if the property has rental history.⁷
Signed lease agreements for properties without tax return history, or when the current lease differs from what’s on the return.
Form 1007 (single-unit) or Form 1025 (two-to-four-unit), ordered through the appraisal.⁵
Two months of bank statements showing rental deposits for existing leases, or proof of the security deposit and first month’s rent for new leases.²
Fannie Mae’s rental income worksheet, which the lender fills out but which is worth understanding so you can spot errors.⁴

The rent schedule forms are ordered with the appraisal and come with an added fee on top of the standard home appraisal. Roughly $100 to $200 is typical, though the cost varies by market.

What the Number Does to Your Debt-to-Income Ratio

The reason this calculation matters is its effect on your debt-to-income ratio, the single most important number in conventional qualification. Fannie Mae allows a maximum DTI of 50% for loans run through Desktop Underwriter. For manually underwritten loans, the ceiling is 36%, with exceptions up to 45% for borrowers with strong credit scores and reserves.⁸

A positive net rental income figure lands on the income side of the ratio. If an investment property throws off $600 a month after the 75% adjustment and PITIA subtraction, that $600 counts the same as salary. A negative result, where the PITIA exceeds 75% of gross rent, lands on the debt side and behaves like any other monthly obligation.⁹

A worked example makes the stakes concrete. Say you earn $8,000 a month from your job, carry $1,500 in existing monthly debts, and own a rental generating $2,400 in gross monthly rent with a $1,500 PITIA. The rental calculation runs $2,400 × 0.75 = $1,800, minus $1,500 PITIA = $300 net positive. Qualifying income becomes $8,300, and your DTI is $1,500 ÷ $8,300, about 18%. Without counting the rental income, you’d add the full $1,500 mortgage to your debts: ($1,500 + $1,500) ÷ $8,000 = 37.5%. That swing can be the difference between approval and denial.

1
Fannie Mae. Rental Income
2
Freddie Mac. Rental Income
3
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
4
Fannie Mae. Rental Income Worksheet
5
Fannie Mae Selling Guide. Appraisal Report Forms and Exhibits
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HUD.gov. FHA Single Family Housing Policy Handbook (Handbook 4000.1)
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Internal Revenue Service. Instructions for Schedule E (Form 1040)
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Fannie Mae. Debt-to-Income Ratios
9
Fannie Mae. Income from Rental Property in DU