Fannie Mae Rental Income Rules Update: Big Change for Conventional Financing (No Lease Needed for a Departing Residence)
A Big Change for Homeowners Moving and Renting
Fannie Mae has updated the rules for documenting rental income on conventional financing, and one change stands out for homeowners who plan to keep their current home as a rental: no lease is needed to count rental income from a departing residence. If you are converting your primary residence into a rental property and using that rent to help qualify for the mortgage on your next home, you now have more flexibility than before.
Under the updated guidance, lenders can establish what the property would rent for and include a portion of that amount in your qualifying income, which can be the difference between qualifying for your next mortgage or not. This guide covers what changed, how the lender establishes market rent, how the 75% calculation works, and what documentation the loan file must contain.
No Lease Needed for a Departing Residence
The headline change is simple: you do not need a signed lease to count rental income from the home you are leaving behind. Fannie Mae's updated rules allow rental income from a primary residence that is being converted into an investment property, which is what a departing residence is, provided the lender documents the income correctly.
In fact, the guidance goes further. Lease agreements are not permitted for a departing residence. Instead of relying on a lease, the lender must establish how much the property would rent for on the open market and use that figure, documented in the loan file, in qualifying.
How Lenders Establish Market Rent
Because a lease is not used for a departing residence, lenders establish the property's rental value using market-based documentation. The updated rules allow the lender to establish market rent in these ways:
- An appraisal or Form 1007. The lender can use an appraisal of the property or Form 1007 (the rent schedule used to support market rents on a mortgage file) to establish monthly market rent.
- Market analysis tools with comparable rentals. The lender can use market analysis tools such as Zillow, Redfin, or the MLS to establish market rent, provided the analysis includes at least three comparable rentals in the same market area, or in the same subdivision when possible.
Whichever method is used, the lender must include all documentation used to determine the monthly market rent in the loan file so underwriting can see exactly how the income was derived.
How Rental Income Is Calculated: The 75% Rule
Once the gross market rent is established, the calculation works like this: the gross monthly market rent is multiplied by 75% to arrive at the rental income used in qualifying. The remaining 25% covers vacancies and property expenses, a long-standing convention in rental income underwriting.
For example, if the market rent for the departing residence is $2,000 per month, the rental income that counts toward qualifying works out to $1,500 per month. How that flows into your debt-to-income ratio and final approval depends on your full financial picture, so a licensed loan officer should run the numbers for your situation.
Documentation the Lender Must Collect
The lease change does not remove the paperwork. When rental income from the departing residence is used in qualifying, the lender must:
- Document a current housing payment. Rental income from the departing residence can be used in qualifying only when the lender documents a current housing payment on the property being converted to a rental.
- Include all documentation used to determine monthly market rent in the loan file. Everything that supports the market rent, whether it comes from an appraisal, Form 1007, or a market analysis with comparable rentals, must be kept in the file.
Something to keep in mind: because lease agreements are not permitted for a departing residence, the market rent documentation is the substitute, so collecting the right documents before you start the loan process keeps your application moving.
Multi-Unit Properties: Tax Returns Required
The updated rules also address what is required for multi-unit properties. For tenant-occupied units in a multi-unit property, the lender must obtain the most recent year of individual federal income tax returns, IRS Form 1040, to support the rental income received for those properties.
In other words, when rents are already coming in from existing tenants in a multi-unit property, the lender expects the income to be traceable through your tax returns. Having the most recent year of returns ready before you apply reduces back-and-forth with underwriting and keeps the closing on schedule.
Why This Matters for Virginia Homeowners
Across Fredericksburg, Spotsylvania, Stafford, King George, Caroline, and the rest of the region Barbara serves, many move-up buyers choose to keep their current home as a rental rather than sell it. In that scenario, rental income from the departing residence can genuinely expand purchasing power, especially now that a lease is not required and market-based documentation is enough to establish the rent.
As with any underwriting rule, the practical result depends on your income, your existing debts, your new housing payment, and the market rent your home actually commands. A licensed mortgage professional can apply the rule to your exact numbers.
Frequently Asked Questions
Can I use rental income from my current home to qualify for a new conventional loan?
Yes. If your primary residence is being converted into a rental and you finance your next purchase with a conventional loan, Fannie Mae now allows rental income from that departing residence to count toward your qualifying income, and no lease is needed. The lender must document a current housing payment on the departing property and establish the market rent with an appraisal, Form 1007, or a market analysis with at least three comparable rentals.
Do I need a lease to count rental income from my departing residence?
No. Under Fannie Mae's updated rules, a lease is not required for a departing residence. In fact, lease agreements are not permitted for a departing residence. The lender instead establishes market rent using an appraisal, Form 1007, or market analysis tools such as Zillow, Redfin, or the MLS with at least three comparable rentals in the same market area or subdivision when possible.
How is rental income calculated for a departing residence?
The lender establishes the gross monthly market rent and multiplies it by 75% to find the rental income used in qualifying. The remaining 25% accounts for vacancies and maintenance. The lender must document a current housing payment and include all documentation used to determine the monthly market rent in the loan file.
How does the lender establish market rent without a lease?
The lender can use an appraisal or Form 1007, or market analysis tools such as Zillow, Redfin, or the MLS. When using market analysis tools, the analysis must include at least three comparable rentals in the same market area, or in the same subdivision when possible.
What documentation is required for a multi-unit property?
For tenant-occupied units in a multi-unit property, the lender must obtain the most recent year of individual federal income tax returns, IRS Form 1040, to support the rental income received for those properties.
The Bottom Line
Fannie Mae's rental income rules update is a meaningful change for homeowners who want to keep their current home as a rental and use its income to buy the next one. The biggest takeaway: you do not need a lease for a departing residence on a conventional loan. Lenders can establish market rent with an appraisal, Form 1007, or a market analysis of at least three comparable rentals, count 75% of gross market rent toward qualifying, and are required to document a current housing payment and keep all market rent support in the loan file.
If you are thinking about keeping your current home as a rental and buying a new one, the first step is to run your numbers with a mortgage professional who structures conventional loans every day and knows what the file needs to support rental income. The professionals listed below can help with exactly that.
Who to Talk To About Your Numbers
For specific questions about how this change applies to your situation, reach out to Mike Sanchez or Ken Melendez at Guaranteed Rate. They are established mortgage professionals serving the Fredericksburg area and can walk you through how the updated rental income rules apply to your exact scenario.
You can also reach out to me any time. I am happy to connect you with vetted lenders and to talk through your plans to buy, sell, or hold a Virginia rental. Call me at (540) 840-1133 or email Yourexpertadvisors@gmail.com.
Educational Note
This article is general educational information about a Fannie Mae guidelines update and is not financial, tax, or legal advice. Loan program availability, lender guidelines, and underwriting requirements vary and can change. Please confirm the details of the rental income rules discussed here with a licensed loan officer before relying on them in a transaction.
Thinking About Buying or Keeping a Rental?
Barbara Jennings, eXp Realty, serves buyers and sellers across Fredericksburg, Spotsylvania, Stafford, King George, Caroline, Orange, Fairfax, Culpeper, Arlington, Alexandria, and Prince William County. If you are planning your next move, reach out to talk through your local market and the financing steps that matter.
Call or text (540) 840-1133 or email Yourexpertadvisors@gmail.com.
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