FHA LOANS: Qualifying Your Rental Income to Secure an FHA Loan
Oct 13, 2021
So, you’ve purchased a property & you’re collecting rent – now you want to get a FHA home loan. Luckily, there are some guidelines that can help you qualify the rent you collect as income, which can then help you secure the FHA loan.
There are, however, some lengthy rules to determine if your rental income meets FHA loan minimum standards. These are outlined in HUD 4000.1 but we’ve put together a shortlist here.
First things first,
make sure you have copies (never originals) of the relevant paperwork associated with your employment and income, including tax documents, W2 forms,pay stubs, etc.
What is Considered “Rental Income?”
If your income is derived in whole or in part by rent payments, the lender will need to see documentation for that, too. But first, it’s important to understand what is considered rental income under the FHA loan program (as noted in HUD 4000.1):
“Rental Income refers to income received or to be received from the subject Property or other real estate holdings.”
This definition is likely intended for several reasons, including the prevention of “grey areas” where rental earnings are concerned.
Now, onto getting your rental income approved…
So, of course supporting documentation is crucial (& required) in order to even consider using rental income to qualify for a FHA loan. But you also have to prove that you have experience as a landlord and supply a record of rental income from tax documents.
For landlords with 2+ years of rental income, they’ll be checking your tax returns to determine what your effective income is; most specifically, Schedule E. So make sure you have that tidied up before submitting your information.
Then, the company offering you the mortgage will add the net rental income to your gross income & average the amounts shown on your Schedule E, taking into consideration depreciation, mortgage interest, taxes, insurance and any HOA dues to calculate net income or loss.
If you’ve been a landlord for less than two years, you should provide the date of acquisition by providing the deed, Settlement Statement or a similar legal document. Then they will annualize the rental income for the length of time that the property has been owned.
But what if I just started earning rental income?
Still new? That’s okay, there is some other information you can provide to get you qualified —
For Two-to-Four Units
If you don’t have a history of rental income since the last time you filed your taxes, you must obtain an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Income Property Appraisal Report) and the leases, if available.
For One Unit
You must obtain the following:
- 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
- Fannie Mae Form 216/Freddie Mac Form 998
- Operating Income Statement showing fair market rent
- If available, the lease(s)
Calculating the effective income from rental properties when you are a new landlord also has its own set of guidelines you should follow. As stated in HUD 4000.1, in order to calculate the effective income, you should use the lesser of:
- the monthly operating income reported on Freddie Mac Form 998
- 75% of the less of:
- fair market rent reported by the appraiser
- the rent reflected in the lease or other rental agreement
We know this can all sound confusing, but we want you to know that we’re always here as a resource! We have plenty of recommendations and we’re here to help every step of the way. Get in touch to chat today!