Can Rental Income Be Used to Qualify for an FHA Mortgage?

FHA loan rules for single family purchase loans include guidelines for the lender to use if the applicant has rental income. Some want to know whether it is possible to qualify for an FHA mortgage using rental income, whether that’s income they are already getting or money they expect to earn from renting out the unused living units in the home they want to buy with the FHA mortgage.

The real issue is whether the rental income meets FHA loan rules found in HUD 4000.1, the FHA Single Family Lender’s Handbook. It will not matter whether rental income makes up some or all of your gross earnings, if you earn money in this way your lender must document it and ensure it is verifiable.

FHA loan rules in HUD 4000.1 addressing the rental income issue starting on page 202. That section begins, “Rental Income refers to income received or to be received from the subject Property” or “other” real estate holdings.

This addresses the borrower question about projected rental earnings. 

HUD 4000.1 instructs the lender, "The Mortgagee may consider Rental Income from existing and prospective tenants if documented” according to FhA loan rules. Rental Income from the subject Property “may be considered Effective Income when the Property is a two- to four-unit dwelling,” or what the FHA describes as an acceptable one- to four-unit property.

And then there is the question of the applicant’s experience earning money in this way--how long have you been a landlord? Do you have a record of rental income? You must support this with any written documentation the lender requires such tax forms, bank statements, etc.

Those who do not have a history of being a landlord should know that the FHA loan rulebooks does include a section on reviewing applicants with no rental income history. The rules vary depending on property size. 

For a single-unit property, The Mortgagee must verify and document the proposed Rental Income by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report; Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule; and Fannie Mae Form 216/Freddie Mac Form 998, Operating Income Statement, showing fair market rent” and, HUD 4000.1 adds, if available, the prospective lease.

To calculate a borrower's effective income from rental property in cases like these, HUD 4000.1 states:

"To calculate the Effective Income from the subject Property where the Borrower does not have a history of Rental Income from the subject Property since the previous tax filing” the lender is required to use the lesser of:
 

• The monthly operating income reported on Freddie Mac Form 998; or
• 75% of the lesser of fair market rent reported by the Appraiser; or the rent reflected in the lease or other rental agreement.

For properties with two or more units, the Mortgagee must verify and document the proposed Rental Income by obtaining an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Income Property Appraisal Report) and, if available, the prospective leases.

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