Rental income is becoming more and more common as people see the value in owning real estate as an investment.   Some of the most common underwriting questions I answer is how to handle the different types of rental income.  I find many people are still using out-dated guidelines that have been changed in the last three to twelve months at both agencies.

This blog is going to be a three-part series, I want to break down the information for FNMA and FHLMC loans in the following three categories.

  • 2-4 unit primary residence rental income
  • Rental income for subject property
  • Rental income for non-subject properties (including when the borrowers business owns a property)

So let’s get started on rental income when your subject property is a 2-4 unit primary residence here is a few examples on the math.

Rental Income for 2-4 Unit Primary Residence

Example 1
Purchase of a new 2 unit property where there is a current tenant in the 2nd unit.

Step 1 use the lowest number between the active lease and the appraisers comparable rent schedule market rent rate.  For this example, we will say the lease is $500 and the market rent is $600 this means our $500 lease is used as gross rental income.

Step 2 calculate DTI

$5,000 borrowers job income
$375   75% of the $500 Lease                                
$5,375   Total Income

$700       Subject property PITI
$200       Installment / Revolving Debt
$300       Alimony payment
$1,200   Total Debt’s

Final DTI
13.02   Housing Ratio        ($700 primary payment / $5,375 gross income)
22.33   Total Debt Ratio  ($1,200 total debts / $5,375 gross income)

** Note in most L.O.S. systems you would put $375 rental income in the income section (same area where you enter social security or tip income), some systems have the choice in the submenu of subject property rental income, some just user “other” and explain the math on your 1008**

Quick Tips

  • Rental income on subject can be used for either agency
  • No landlord history is required to qualify
  • No reserves required on primary resiedence

Example 2
Purchase of a new 2-unit property where the 2nd unit is vacant

Step 1 determine market rent rate, since there is no active lease use the appraisers market rent rate from the comparable rent schedule, in this case we will use $600

Step 2 calculate DTI

$5,000 borrowers job income
$450   75% of the $600 market rent rate                                
$5,450   Total Income

$700       Subject property PITI
$200       Installment / Revolving Debt
$300       Alimony payment
$1,200   Total Debt’s

Final DTI
12.84     Housing Ratio     ($700 primary payment / $5,450 gross income)
22.02    Total Debt Ratio  ($1,200 total debts / $5,450 gross income)

Quick Tips

  • Rental income on subject can be used for either agency
  • No landlord history is required to qualify
  • No reserves required on primary resiedence
  • If using FHLMC make sure to complete the MOI

Example 3
Refinance of the borrowers current 2-unit property with rental income on schedule E

First step is to review the borrowers schedule E and calculate the gross rental income

Example Schedule E Income
Add the following lines
$6,000   Line 3    Rents Received
$500       Line 9   Insurance
$600       Line 12 Mortgage Interest
$800       Line 16 Taxes
$200       Line 18 Depreciation
$8,100   Sub Total

Subtract this line
($4,500) Total Expenses Line 20

Final Gross Income
$8,100 Sub Total subtract expenses $4,500 = $3,600 per year / 12 months = $300 monthly gross income
Step 2 calculate DTI

$5,000 borrowers job income
$300    calculated gross income from schedule E                                
$5,300   Total Income

$700       Subject property PITI
$200       Installment / Revolving Debt
$300       Alimony payment
$1,200   Total Debt’s

Final DTI
13.21     Housing Ratio     ($700 primary payment / $5,300 gross income)
22.64    Total Debt Ratio  ($1,200 total debts / $5,300 gross income)

Quick Tips

  • Mustuse Schedule E number if borrower has filed a return
  • Can only use lease if subject was purchased after most recent tax year OR if property meets agency qualifying exceptions

Agency guideline references
FNMA B 3-3 1.08 Rental Income dated 09/29/15
FNMA Form 1037
FHLMC 5306.1 Rental Income dated 03/02/16

In part 2 of this series we will be going over subject property rental income.  Also we know there are a lot of rules and math to complete.  UberWriter will complete the math, follow the rules, and make your rental income calculations a breeze for any property!  NOTE we are completing a major update to the REO functions, this update will be launched on June 20th, go to our website and try UberWriter for 30 days free, no credit card required. You will be the first to experience the all new REO interfaces for income calculations!