Rent can carry a big part of a mortgage approval. Lenders don't count every dollar of it, though. They take 75% of the expected rent and either add it to your income or use it to cancel out a rental's own payment. The 25% held back is a cushion for vacancies and repairs.
Two ways rent shows up in the math
Rent from the home you're buying. On a duplex, triplex or fourplex where you'll live in one unit, 75% of the other units' rent is added to your gross monthly income. FHA uses the lower of the appraiser's market rent estimate or the signed lease. Conventional uses the lease or the appraiser's rent schedule.
A home you already own. When you keep your current home and rent it out, or already own a rental, the lender nets it: 75% of the market rent minus that property's full payment. Under Fannie Mae's rules, a positive result wipes out that payment and a negative result counts as a monthly debt.
A duplex where the rent carries the approval
A buyer earning $4,900 a month gross is buying a $380,000 duplex with FHA's 3.5% down, living in one side and renting the other for $2,100 a month.
| Payment piece | Monthly |
|---|---|
| Principal and interest on $373,117.25 (the $366,700 loan plus 1.75% upfront MIP) at a 5.75% rate | $2,177.41 |
| Annual MIP at 0.55% | $168.07 |
| Property taxes at 0.95% a year | $300.83 |
| Homeowners insurance | $290.00 |
| House payment | $2,936.31 |
Seventy-five percent of $2,100 is $1,575. Added to the buyer's $4,900, qualifying income becomes $6,475.
- Housing ratio without the rent: $2,936.31 divided by $4,900 is 59.92%, well over FHA's 46.9%.
- Housing ratio with the rent: $2,936.31 divided by $6,475 is 45.35%, under 46.9%.
- Total ratio with a $300 car payment: $3,236.31 divided by $6,475 is 49.98%, under 56.9%.
The tenant's rent turns a payment the buyer couldn't carry alone into an approval with room to spare.
Netting rent on a home you keep
Say you're moving out of a house whose payment is $1,650, and the market rent is $2,400. Seventy-five percent of $2,400 is $1,800. Subtract $1,650 and you're $150 ahead, so the old payment drops out of your debts entirely. If that house's payment were $1,975 instead, $1,800 minus $1,975 leaves a $175 shortfall, and the lender counts $175 a month as a debt instead of the full $1,975.
Making the rent count
- Ask for the appraiser's rent estimate early, since it can set the figure on FHA.
- A signed lease on the rented unit at a market rate makes the number easy to document.
- Plan for reserves: FHA wants 3 months on 3 and 4 units, and Conventional wants 6 months on 2 to 4 units.
- On a triplex or fourplex with FHA, the rent also has to pass the self-sufficiency test.
Put the price and the unit rents into the house hacking calculator to see how much of the payment your tenants cover. Call AAA Capital Funding at 888-601-8344 and we'll run the rent and your income through FHA and Conventional side by side.