Fannie Mae Rental Income Rules Update: Using Rent From Your Current Home to Qualify for a Conventional Loan
Considering selling your current home and buying your next one, but wondering whether the rent you could earn on the old property can help you qualify? Fannie Mae has updated its rules for documenting rental income on conventional financing, including a major change for departing residences, a home being converted to an investment property. This guide explains who can use projected market rent, how lenders calculate it, and what documentation belongs in the loan file.
The Big Change: No Lease Needed
Under the updated rules, no lease is needed to use rental income from a primary residence that is being converted to an investment property. For a departing residence, lease agreements are not permitted. Instead, lenders can establish market rent using an appraisal or Form 1007, or through market analysis tools such as Zillow, Redfin, or MLS, using at least three comparable rentals when possible from the same market area or subdivision.
Who This Applies To: The Departing Residence
When you sell your current home and buy another, your existing home can become what Fannie Mae calls a departing residence: a property being converted from your primary residence to an investment property. Historically, lenders often wanted a signed lease before counting rental income, which created a chicken-and-egg problem for homeowners who needed the income to qualify for the next mortgage. The updated guidance changes that for conventional financing.
- No lease agreement is required for a primary residence being converted to an investment property.
- Lease agreements are not permitted for a departing residence when documenting this projected rental income.
- Market rent establishes the figure, determined through an appraisal or Form 1007, or through market analysis tools like Zillow, Redfin, or MLS.
How Market Rent Is Calculated
When no lease exists, the lender establishes what the home could reasonably rent for in today's market. Lenders may use an appraisal or Form 1007, the Appraisal Report for Rental Income, to document that rent. They may also use market analysis tools such as Zillow, Redfin, or MLS. Whichever method is used, the analysis should be supported by at least three comparable rentals from the same market area or subdivision whenever possible.
The 75% Rule
Once market rent is established, lenders multiply the gross market rent by 75% when calculating the rental income that can be used toward qualifying. The remaining 25% accounts for vacancies, repairs, and other rental expenses, so the income that counts toward your debt-to-income ratio is 75% of the property's gross market rent.
This is particularly relevant for downsizers moving between homes in the Fredericksburg, Stafford, Spotsylvania, and Northern Virginia area, where converting your current home to a rental can help bridge the move to a smaller, lower-maintenance property while keeping equity working for you.
What You and Your Lender Need to Document
To use rental income from the departing residence in qualifying, the lender must document a current housing payment for the borrower. That tie between your existing payment and the property being converted helps establish that you are, in fact, vacating the home and turning it into a rental. In addition, all documentation used to determine the monthly market rents must be included in the loan file.
- A documented current housing payment is required when using rental income from the departing residence.
- All documentation used to determine monthly market rents, whether the appraisal, Form 1007, or the comparable rental analysis from Zillow, Redfin, or MLS, must be included in the loan file.
- Do not sign a lease for the departing residence: lease agreements are not permitted under this approach for converting a primary residence.
A Different Set of Rules: Multi-Unit Properties
For a multi-unit property, the documentation requirements differ. The lender must obtain the most recent year of the borrower's individual federal income tax returns, IRS Form 1040, to support rental income received for tenant-occupied properties. This applies where the property already has tenants and rental income history, rather than projected market rent on a vacant departing residence. If you own a duplex or other multi-unit building, be prepared to supply your most recent year of federal tax returns so the lender can verify the rental income actually received.
Frequently Asked Questions
Can rental income from my current home help me qualify for a new conventional loan?
Yes. Under Fannie Mae's updated rules for conventional financing, projected market rent from a departing residence, a home being converted from your primary residence to an investment property, can be used in qualifying without a signed lease. Lenders may establish that market rent using an appraisal or Form 1007, or through market analysis tools such as Zillow, Redfin, or MLS, and the rental income counted toward qualifying is typically 75% of the gross market rent.
Do I need a lease to count rental income from my departing residence?
No. For a primary residence being converted to an investment property, no lease is needed to use rental income toward qualifying, and lease agreements are not permitted for a departing residence under this approach. Instead, the lender establishes market rent through an appraisal, Form 1007, or a market analysis tool such as Zillow, Redfin, or MLS.
How is rental income calculated when I rent out my current home?
The lender first establishes gross market rent for the property, typically using an appraisal or Form 1007, or a market analysis tool with at least three comparable rentals from the same market area or subdivision when possible. That gross market rent is then multiplied by 75%, and the resulting figure is what counts toward your qualifying income, reflecting typical vacancies and rental expenses.
What is Form 1007?
Form 1007 is an appraisal report form used to document the market rent of a property, sometimes called an Appraisal Report for Rental Income. It is one of the acceptable ways for a lender to establish gross market rent for a departing residence when no lease exists, alongside other market analysis tools such as Zillow, Redfin, or MLS.
What documentation must go in the loan file to use rental income from my departing residence?
To use rental income from a departing residence, the lender must document a current housing payment and must include all documentation used to determine the monthly market rents in the loan file. That includes the appraisal or Form 1007, or the comparable rental analysis from Zillow, Redfin, or MLS, used to establish gross market rent.
Do the same rules apply to multi-unit properties with tenants?
No. For a multi-unit property, the lender must obtain the most recent year of the borrower's individual federal income tax returns, IRS Form 1040, to support rental income received for tenant-occupied properties. That differs from the projected market rent approach used for a vacant departing residence.
Educational Information, Not Financial Advice
This article summarizes Fannie Mae rental income documentation rules for conventional financing in plain language for educational purposes only. It is general information, not financial, tax, or mortgage advice, and it does not replace the underwriting guidelines of your lender. Loan programs, investor guidelines, and eligibility requirements change and vary by situation. Confirm every detail with a licensed loan officer before relying on rental income to qualify for a mortgage.
Wondering How This Applies to Your Move?
Renting out your current home while buying your next one can be a powerful downsizing strategy, but the details depend on your loan file and your lender's guidelines. Barbara Jennings, REALTOR® with eXp Realty®, can help you think through whether converting your current home to a rental fits your next-chapter plan. Reach Barbara at 540-840-1133 or email Yourexpertadvisors@gmail.com.
Mike Sanchez and Ken Melendez are licensed mortgage professionals at Rate (Guaranteed Rate). Connect with them for the specifics of how rental income rules apply to your conventional loan file.
Planning Your Next Move?
Whether you are selling, buying, or renting out your current home, Barbara can help you build a plan that fits your budget and your life.
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