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| What Types of Rental Properties Qualify? |
When applying for a mortgage loan backed by Fannie Mae, rental income can be used to qualify if specific requirements are met. Fannie Mae's guidelines allow both income from investment properties as well as rent received on a primary residence to supplement the borrower's qualifying income.
Understanding Fannie Mae's rental income documentation, calculation, and qualification standards is crucial for any landlord or real estate investor seeking financing on an investment property or primary residence. This comprehensive guide will provide everything you need to know about counting rental income when applying for a Fannie Mae loan.
How Fannie Mae Calculates Rental Income
Fannie Mae has specific methods for calculating qualifying rental income from both investment properties and primary residences. Here are the key criteria to understand:
Documentation Required
To count rental income for qualification, full documentation is required per Fannie Mae guidelines. This includes:
- Lease agreements with minimum 12 month term
- Two years of tax returns showing rental income
- Two years of bank statements tracking deposits
Calculating Monthly Rental Income
Fannie Mae requires taking the lesser of the:
- Actual monthly rent per the lease
- Fair market rent as defined by the lender
Additional qualifying rental income can be added from units that will become vacant and available for rent within 90 days.
Expenses and Vacancy Allowances
When estimating net rental income, Fannie Mae allows mortgage lenders to reduce gross rents by:
- 25% vacancy allowance
- Expenses per Schedule E of the tax returns
No Rental Income from Primary Residence
When using a 2-4 unit primary residence to qualify, Fannie Mae guidelines do not allow rental income from the units to supplement qualifying income. Only the borrower's principal residence is counted.
What Types of Rental Properties Qualify?
Fannie Mae sets standards for which types of rental properties can be used for qualifying income:
1-4 Unit Primary Residence
If the borrower resides in a 2-4 unit primary residence, the rental income may be used to qualify by applying Fannie Mae's calculation methodology.
Single Family Investment Property
Rental income from single family investment properties where the borrower does not reside can supplement qualifying income.
2-4 Unit Investment Property
Income from 2-4 unit investment properties can be counted following Fannie Mae guidelines.
Note that co-ops, manufactured homes, and group homes do not qualify for rental income per Fannie Mae requirements.
Fannie Mae Rental Income Documentation
Fannie Mae has stringent documentation requirements to verify rental income used for qualification:
Lease Agreement
A current signed lease agreement with a minimum 12 month term is required. Month-to-month leases are not allowed.
Tax Returns
Two years of personal tax returns showing Schedule E with rental income. Positive rental income for both years is ideal.
Bank Statements
Two years of bank statements tracking deposits of rental payments. Statements must show consistency with lease and tax returns.
Property Management Agreement
If a property manager is used, provide a copy of the management agreement.
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FAQs on Fannie Mae Rental Income Guidelines
Many borrowers have questions about the details of Fannie Mae's rental income standards. Here are answers to some frequently asked questions:
How is fair market rent determined?
Lenders order an appraisal that includes an opinion of fair market rent for the property. This determines the max rental income that can be used.
What if my tax returns show negative income from rentals?
Loss of rental income on tax returns must be deducted from qualifying income. Profitability will need to be documented with lease and bank statements.
Can I buy another rental property and immediately count its rents?
No, Fannie Mae requires a history of receiving rental income, so new properties would not qualify without waiting at least one year.
Do units being renovated count toward rental income?
If a unit will be vacant for repairs for 90 days or less, Fannie Mae allows its rental income for qualification purposes.
Can I count Airbnb or short-term rental income?
No. Fannie Mae requires a 12 month lease term, so short-term rental income cannot be used.
Tips for Optimizing Rental Income When Applying
When applying for a mortgage loan backed by Fannie Mae, here are some tips for making the most of your rental income:
- Highlight strong leases with multi-year terms extending beyond the loan closing
- Obtain appraisal with fair market rent supporting rents on new leases
- Delay non-essential repairs and renovations until after closing
- Resolve any outstanding maintenance issues prior to the appraisal
Careful preparation and paperwork will allow for a smooth process when purchasing or refinancing investment property.
Conclusion
Fannie Mae's guidelines for counting rental income allow landlords and real estate investors to use rents to qualify for financing. By providing complete documentation, calculating rental income properly, and meeting all eligibility requirements, purchasers can maximize their purchasing power when buying or refinancing investment property.
Following the standards outlined in Fannie Mae's Selling Guide is essential for successfully using rental income to qualify for loans backed by Fannie Mae. This article has provided an in-depth overview of Fannie Mae's rental income calculation, documentation, and qualification requirements so borrowers understand the process.
