When purchasing a home with an FHA single-family loan, a prospective borrower may want to know whether rental income from the property to be purchased with an FHA mortgage can be counted in the borrower’s debt-to-income ratio.
FHA loan rules do permit this under specific circumstances, and borrowers should know that FHA loan occupancy rules apply. Borrowers are required to occupy the home as their primary residence, but for those purchasing property with more than one unit, the rental issue is a factor many consider.
The rules for rental income are found in HUD 4000.1 and include the following:
“The Mortgagee may consider Rental Income from existing and prospective tenants if documented in accordance with the following requirements. Rental Income from the subject Property may be considered Effective Income when the Property is a two- to four-unit dwelling…”
However, not all FHA borrowers have rental property management experience, and FHA loan rules address this issue. “Where the Borrower does not have a history of Rental Income from the subject since the previous tax filing”, the rules say, there are additional requirements:
“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”. That rule addresses properties with more than one living unit.
The amount of experience a prospective borrower has as a landlord can factor in:
“Where the Borrower has a history of Rental Income from the subject since the previous tax filing, the Mortgagee must verify and document the existing Rental Income by obtaining the Borrowers most recent tax returns, including Schedule E, from the previous two years. For Properties with less than two years of Rental Income history, the Mortgagee must document the date of acquisition by providing the deed, Settlement Statement or similar legal document.”
Additionally, FHA loan rules spell out what needs to be done for borrowers with no history of rental income (since the last tax filing) under HUD 4000.1 requirements:
“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 Mortgagee must use the lesser of:
–the monthly operating income reported on Freddie Mac Form 998; or
–75 percent of the lesser of fair market rent reported by the Appraiser or the rent reflected in the lease or other rental agreement.”
To learn more about these requirements, ask your loan officer about what may apply in your circumstances.