Written by The Commonwealth Group
Underwriting guidelines change rapidly. For the most up-to-date information, please refer to the Fannie Mae Selling Guide at Selling Guide | Fannie Mae or for Freddie Mac at Guide Home. This post focuses on Fannie Mae requirements. Rental income moved to its own section of the Selling Guide, B3-3.8, as part of the income assessment restructuring, and the September update applies to loans with application dates on or after November 1, 2026. Read the current sections before you rely on this summary.
Rental income is one of those topics every underwriter thinks they know, right up to the moment a file lands on their desk with a departing residence, an accessory dwelling unit, and a borrower who bought their first rental eight months ago. Then the questions start. Which number do I use? Can I use the lease? Does the income count at all?
Fannie Mae has now given rental income its own home in the Selling Guide. The old B3-3.1-08 location is gone, and the rules now live in B3-3.8, with SEL-2026-08 applying the latest revisions to loans with application dates on or after November 1, 2026. This post walks through how the pieces fit together. Our earlier post on REO held in a business entity covers whether full PITIA can be excluded for a rental titled in an LLC. This one is about the income side of the ledger.
Step One: Is the Rental Income Usable at All?
B3-3.8-01, General Rental Income Information starts with the gate. Generally, rental income from the borrower's principal residence or a second home cannot be used to qualify, with exceptions for boarder income and for principal residences with accessory units. Rental income elsewhere must be likely to continue, and the borrower's current housing payment must be documented.
The next gate is experience. Lenders may use positive rental income to qualify only if the borrower has at least 12 months of property management experience. The usual proof is the most recent signed Form 1040 with Schedules 1 and E showing 365 Fair Rental Days, or Form 1065 or 1120S with Form 8825. Where the history is thin, a signed lease of at least 12 months or two years of returns may fill the gap. With less than 12 months of experience, rental income can only offset PITIA. It cannot add to income.
Step Two: Pick the Right Documentation Path
Subject property, purchase. B3-3.8-02, Rental Income from the Subject Property calls for Form 1007 or Form 1025 and, if a lease is transferred to the borrower, the fully executed lease. If market rents do not reasonably support the lease rents, the lender needs a written analysis or must use the lesser amount.
Subject property, refinance. The most recent 1040 with Schedules 1 and E, the appraiser's rent schedule, and the current lease where one of the qualifying examples applies.
Other properties owned. B3-3.8-04, Rental Income from Non-Subject Property has no property type restriction, and the borrower's most recent 1040 is needed whether or not the property appears on it.
Departing residence. B3-3.8-05, Rental Income from Non-Subject Property: Departing Residence is the exception to remember. Lease agreements are not permitted for any departing residence. Market rent comes from an appraisal, a Form 1007, or a market analysis with at least three comparable rentals.
Lease rules matter wherever a lease is used. Rent must be in U.S. dollars and cannot be in virtual currency. A newly executed lease signed within two months of application on a property not yet on the tax return must run at least six months, with the first rent due on or before the first payment date of the subject mortgage. The lease cannot be with an interested party or family member.
Putting Numbers to It: The 75 Percent Rule
For a purchase of an investment property, the Guide takes gross rent times 75 percent to arrive at net rental income, then subtracts the full PITIA to reach the adjusted net rental income. The figures below are hypothetical.
Shortfall. Market rent of $2,400 times 75 percent is $1,800. With PITIA of $2,050, the adjusted net rental income is negative $250. The borrower's experience does not matter here. A negative result goes into the DTI as a $250 monthly obligation.
Surplus, experienced landlord. Market rent of $3,000 times 75 percent is $2,250. With PITIA of $1,900, the adjusted net rental income is positive $350. With 12 or more months of experience, $350 is added to qualifying income.
Same surplus, new landlord. With less than 12 months of experience, the same $350 may only offset PITIA. It cannot be added to income.
For a departing residence, the same 75 percent calculation applies, but a positive result can only offset PITIA, and the Guide adds a reserve requirement. When the borrower has less than 12 months of experience, the lender must document six months of reserves to cover the PITIA of the vacated property, in addition to any reserves required for multiple financed properties.
Accessory Dwelling Units
Rental income from an accessory dwelling unit is allowed from one existing unit only, in connection with a one-unit primary residence. It is limited to purchase and limited cash-out refinance transactions, and ADU income is capped at 30 percent of total qualifying income.
Where QC Finds the Defects
Rental income used on a second home or principal residence. Check for one of the exceptions before accepting it.
Positive rental income used without 12 months of experience. The proof is on the tax return or the lease, and it must actually be in the file.
A lease used for a departing residence. The Guide does not permit it.
Gross rent used without the 75 percent factor. Or a lease amount used when market rents do not support it, with no written analysis.
Schedule E not matched to the story. A property with fewer than 365 Fair Rental Days and no supporting explanation, or a purchase date that does not line up with the return.
Form 8825 rent treated as ordinary rental income. Rent reported through a partnership or S corporation is evaluated as self-employment income.
ADU income over the cap, or on the wrong transaction type.
Eligible rent not reported. Gross monthly rent must be reported to Fannie Mae for two- to four-unit principal residences and investment properties, whether or not rent is used to qualify.
Application date confusion. Know which version of the rules applies to each loan.
The "Why" Behind the Rental Income Refresher
Rental income looks like arithmetic, but it is really a documentation test. Every dollar added to income needs a source, a history, and a reason to expect it to continue. When one of those is missing, the DTI that looked comfortable at closing is the DTI that fails in the review.
The Commonwealth Group: Precision. Integrity. Results.
When a file has more than one property and more than one set of rules, the right partner makes the difference. At The Commonwealth Group, our contract underwriting and quality control teams work the rental income calculation the way the Guide does, document each step, and flag the files where the answer depends on what the borrower actually owns. We do not just follow the guide; we know what to do when the guide is not enough.
Ready to go beyond the guide?
Contact Martin Luplow at The Commonwealth Group – info@thecommonwealth.net for more information on what our team of professionals in processing and underwriting can do for your company.
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