Can Rental Income Be Used to Qualify for an FHA Mortgage?
April 1, 2023
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.
------------------------------
RELATED VIDEOS:
Do What You Can to Avoid Foreclosure
Homes Financed With FHA Loans Must Be Owner Occupied
FHA Programs for First-Time Homebuyers
FHA Loan Articles
January 15, 2025Buying a condo with an FHA loan is an option some don’t consider initially, but it’s worth adding to your list of potential property types. FHA loans for condo units traditionally require condo projects to be on or added to the FHA-approved list. Still, changes in policy over the years allow borrowers to apply for FHA loans on condo units in projects not on the list on a case-by-case basis.
December 30, 2024When applying for an FHA loan, lenders will consider more than just your credit scores and history. They also look at other factors affecting your risk profile and the interest rate they offer you.
One factor is occupancy type. For FHA loans, this is straightforward because these loans require owner occupancy. Investment properties aren't eligible. While conventional loans may have different rates for primary residences, second homes, and investment properties, this isn't a concern with FHA loans.
December 18, 2024Did holiday spending get the better of you? Are you looking for ways to recover your spending plan as you search for a new home?
The holidays are a whirlwind of festivities, family gatherings, and gift-giving. But amidst the cheer, it's easy to lose track of spending. If you're aiming to buy a home in the near future, those extra expenses can have a bigger impact than you might realize, especially if you're considering an FHA loan.
December 17, 2024The Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders, making homeownership more attainable for those who might not qualify for conventional loans.
While financial factors like credit score and debt-to-income ratio are key to loan approval, other non-financial aspects can also cause a denial.
December 11, 2024FHA loans, insured by the Federal Housing Administration, are a popular choice for many homebuyers, especially those who need a lower downpayment or more forgiving credit qualifying requirements. FHA loans are primarily intended for primary residences—homes that borrowers will occupy as their main dwelling.
