B3-3.5-02, Income from Rental Property in DU (06/01/2022)

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 IncomeB3-3.1-08, Rental Income, and B3-6-06, Qualifying Impact of Other Real Estate OwnedB3-6-06, Qualifying Impact of Other Real Estate Owned, for additional information.

Properties already owned by the borrower must be entered in Section 3 along with the related existing mortgage loan(s). 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 in DU for the Subject Property below.

Investment Property

When submitting rental income to DU for an investment property:

• The lender should calculate the net rental income amount for each property and enter the amount (either positive or negative) in the Net Monthly Rental Income in Section 3.

• If the Net Monthly Rental Income is a “breakeven” amount, the user must enter either $0.01 or $-0.01.

• If Net Monthly Rental Income is not entered or is $0.00, DU will calculate it using this formula:

  (Gross rental income multiplied by 75%) minus property PITIA expense

• The lender can override DU’s calculation by entering the Net Monthly Rental Income amount in Section 3.

Two- to four-unit Principal Residence

When submitting rental income to DU for the borrower’s principal residence that is a two- to four-unit property:

• The lender should calculate the net rental income amount for the property and enter the amount in Net Monthly Rental Income in Section 3.

• The net rental 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 Monthly Rental Income is not entered or is $0.00, DU will calculate it using this formula:

  Gross rental income multiplied by 75%

• The lender can override DU’s calculation by entering the Net Monthly Rental Income amount in Section 3.

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 Questions) for additional details on entry of real estate and rental income.

If the borrower is purchasing a principal residence and is retaining their current residence as a rental property, the current principal residence must be identified in Section 3 by entering 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.

The following rental income policies apply to properties that are the subject property. Refer to B3-3.1-08, Rental IncomeB3-3.1-08, Rental Income to determine the maximum amount of rental income that can be used for qualifying purposes for the subject property.

Investment property: Calculate the net rental income 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 rental income without subtracting the proposed PITIA. Net rental income will be added to qualifying income. The PITIA will be included in the debt-to-income ratio.

Entry in the Loan Application

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 rental income in Net Monthly Rental Income.

• For a property the borrower is purchasing: The borrower enters Expected Monthly Rental Income in Section 4c and the lender must calculate and enter the net rental income in 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 4c 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. Enter Accessory Unit Income in Section 1e. Income from Other Sources in the online loan application.

Refer to  B3-3.1-08, Rental IncomeB3-3.1-08, 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 Reporting of Gross Monthly Rent in  B3-3.1-08, Rental IncomeB3-3.1-08, Rental Income, for additional information.