Boost Your Mortgage Approval with Rental Income

Answer

Introduction:
Many borrowers sit on profitable rental properties and wonder if that cash flow can help secure a new home loan. In most cases, lenders will consider your rental income—so long as you document it properly and meet seasoning requirements.

Main Details:

• Acceptable Loan Programs:
  
  • Conventional (Fannie Mae/Freddie Mac): Under automated underwriting, lenders typically count 75% of gross rental income toward your debt-to-income (DTI) ratio. You need two years of tax returns (Schedule E) showing positive cash flow or a signed lease and proof of timely payments.
  • FHA: The FHA allows rental income if you’ve managed the property for at least three years. You’ll provide Form 92900-A or tax returns plus a 12-month history of deposits that match leases.
  • VA & USDA: Both programs accept verified rental income with similar two-year history rules, though specific requirements can vary by lender.
  • DSCR & Portfolio Loans: Debt-service coverage ratio products focus on net operating income. These specialized mortgages may count up to 100% of rental revenue if your property’s income sufficiently covers expenses and debt.
• Documentation Checklist:
  
  • Signed lease agreements with rent amount and term
  • Two years of federal tax returns showing Schedule E income
  • Bank statements or escrow analysis proving consistent deposits
  • Property management statements (if a third-party manager handles rent)
  • Appraisal report (for DSCR loans) detailing projected rental market rent
• Calculation Nuances:
  Lenders reserve a vacancy factor—often 25%—to cover vacancy risk, which is why you see 75% of gross rent used. For multi-unit properties you occupy one unit, some programs allow 100% of the other units’ rent.
• Zoning & Legal Considerations:
  Verify your local zoning rules and HOA or condominium restrictions on rentals. Misclassified or unpermitted rentals may disqualify that income.

Final Thoughts:
Using rental income can strengthen your mortgage application—especially if you’ve built a reliable tenancy history. Buyers are recommended to verify specific program rules with their lender and it’s advisable to consult a licensed mortgage professional or real estate attorney to ensure your documentation meets underwriting standards.