August 29, 2022
In 2017, we published an article about FHA loan rules and whether it is possible to qualify for an FHA mortgage using rental income.
Back then we cited FHA loan rules and regulations that stated it IS possible, but only if certain conditions are met.
Part of the issue? Whether or not the rental income meets FHA loan rules in HUD 4000.1, the FHA Single Family Lender’s Handbook.
If your income is derived in whole or in part by rent payments, the lender will need documentation to support that. Back in 2017, we reported 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.
That means that it is POSSIBLE your lender may include projected rental income from the property being financed for the FHA loan. You will need to ask your loan officer about this as lender standards may apply in addition to FHA loan rules.
HUD 4000.1 also 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 an acceptable one- to four-unit Investment Property.”
As we wrote in 2017, supporting documentation is required, but another factor may be important for the lender’s decision in this area–experience as a landlord. Do you have a record of rental income? You must support this with data from tax documents submitted with the loan application.
Those who do not have a history of being a landlord will need to understand FHA loan requirements for rental income under such circumstances. HUD 4000.1 has a section instructing the lender for those with no rental income history, which may vary depending on the size of the property.
Two- to Four-Units
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.
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, 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 Mortgagee must use the lesser of:
- 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.
If you do have experience as a landlord, HUD 4000.1 has these instructions:
“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 Borrower’s 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 an equivalent replacement.