Selling Guide

Published April 07, 2021

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B3-3.5-02, Income from Rental Property in DU (12/16/2020)

Introduction

This topic provides information about rental property in DU, including:


Associated Policies

The documentation, calculation, and other requirements that pertain to rental income on an investment property or two- to four-unit principal residence are the same for loans underwritten through DU as they are for manually underwritten loans. See B3-3.1-08, Rental Income, and B3-6-06, Qualifying Impact of Other Real Estate Owned, for additional information.


Entering Net Rental Income in DU

The following rental income policies apply to properties that are not the subject property. For rental income policies on the subject property, see Entering Rental Income for the Subject Property in DU below.

Form 1003 7/05 (rev. 6/09)

“Net rental income” for DU loan casefiles applies to rental income on properties already owned by the borrower that are not the subject property.

To submit net rental income to DU, the lender can either

  • Calculate the total net rental income for all rental properties and enter the amount (either positive or negative) in the Net Rental Income field in Section V. If Real Estate Owned (REO) data is entered in Section VI R, DU will ignore a zero value in the Net Rental Income field in Section V. Therefore, the lender must enter either a positive or negative amount. If the Net Rental Income is a “breakeven” amount, the user must enter either $0.01 or $-0.01. Otherwise, DU will use the value from Section VI R.

  • Complete the REO data in Section VI R for each rental property. If Net Rental Income is not entered, DU will calculate it using the following formula:

    (Gross rental income - 75%) — property PITIA expense = net rental income

    The lender should override DU’s calculation, if it is different from the lender’s calculation, by entering the net rental income amount directly in the Net Rental Income field in the Full 1003, Section VI R.

If the borrower’s principal residence is a two- to four-unit property (and not the subject property), net rental income can be entered in Section V or VI R. Note the following:

  • The net real income calculation is not reduced by the mortgage payment (which is always treated as a liability and included in the debt-to-income ratio).

  • If Net Rental Income is not entered in VI R, DU will calculate it using the following formula:

    Gross rental income — 75% = net rental income

    The lender should override DU’s calculation, if it is different from the lender’s calculation, by entering the Net Rental Income in VI R.

If Net Rental Income is present in both Section V and VI R, DU will use only the Net Rental Income from Section V.

If Net Rental Income is not present in Section V, and the combined total Net Rental Income for all rental properties in Section VI R is positive, DU adds the net rental income to the qualifying income and includes it in the debt-to-income ratio. If the total is negative, DU treats the loss as a liability and includes it in the debt-to-income ratio.

Form 1003 1/2021

Properties already owned by the borrower must be entered in Section 3 along with the related existing mortgage loan(s). If Net Monthly Rental Income is not entered, DU will calculate it (if not the subject property) based on the formulas described above.

If the combined total Net Monthly Rental Income for all properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the debt-to-income ratio.

Refer to the Desktop Underwriter Job Aids (Troubleshooting - DTI Ratio Calculations) for additional details on entry of real estate and rental income.


Conversion of Principal Residence to Investment Property

If the borrower is purchasing a principal residence and is retaining his or her current residence as a rental property, the current principal residence must be identified in the REO section of the loan application as follows:

  • Form 1003 (7/05 (rev. 6/09)): Rental (Property Disposition field)

  • Form 1003 (1/2021): Retained (Status field) and Investment (Intended Occupancy field)

Net rental income to be earned on the property may also be entered and used to qualify in accordance with the above requirements.


Entering Rental Income for the Subject Property in DU

The following rental income policies apply to properties that are the subject property. Refer to B3-3.1-08, Rental Income to determine the maximum amount of rental income that can be used for qualifying purposes for the subject property.

Form 1003 7/05 (rev. 6/09)

“Subject net cash flow” for DU loan casefiles applies to rental income on the subject property. DU does not calculate the subject net cash flow. The lender must calculate and enter the income in Subject Net Cash in Section V of the online loan application.

Investment property: Calculate the net cash flow using the PITIA. If it is positive, it will be added to qualifying income. If it is negative, enter a negative value. DU treats the loss as a liability and includes it in the debt-to-income ratio. If income from the subject property is not used for qualifying purposes, the lender should enter the entire proposed PITIA as a negative amount.

Two- to four-unit principal residence: Calculate the net cash flow without subtracting the proposed PITIA. Net cash flow will be added to qualifying income. The PITIA will be included in the debt-to-income ratio.

Form 1003 1/2021

Rental income for the subject property must be entered as follows:

  • For a property already owned by the borrower: The borrower enters the property in Section 3 and the lender must calculate and enter the Net Monthly Rental Income.

  • For a property the borrower is purchasing: The borrower enters Expected Monthly Rental Income in Section 4b. and the lender must calculate and enter the Expected Net Monthly Rental Income.

If income from an investment property is not included in the qualifying ratios, the lender must enter the entire proposed PITIA as a negative amount in Section 3 or 4b as applicable.

Note: Rental income from a one-unit principal residence with an accessory unit or from a two- to four-unit principal residence is an acceptable source of qualifying income on HomeReady loans.


Documentation of Rental Income

Refer to B3-3.1-08, Rental Income for the applicable documentation requirements. If the debt-to-income ratio includes the entire rental property payment and income from the property is not used in qualifying, rental income documentation is not required. However, documentation of gross monthly rent for the subject property is required for lender reporting purposes.See A3-4-02, Data Quality and Integrity, (Reporting of Gross Monthly Rent), for additional information.

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