Homebuyers and real estate investors often wonder, can rental income be used to qualify for a mortgage? The answer is yes, but lenders have specific rules regarding how rental income is calculated and applied. Whether you’re an investor purchasing a new property or a homeowner looking to leverage rental earnings, understanding these guidelines is crucial.

How to Use Rental Income to Qualify for a Mortgage in 2025

rental home income

In this article, we will explore how rental income can be used to qualify for a mortgage, lender requirements, calculation methods, and tips to improve your approval chances.

The Refiguide staff will provide lending guidelines for rental income from competitive mortgage lenders online.

Understanding Rental Income for Mortgage Qualification

Rental income is money earned from leasing out a residential or commercial property. Lenders allow borrowers to use this income to qualify for a mortgage, provided that it meets specific criteria. However, simply stating that you earn rental income is not enough; lenders require proper documentation, proof of consistency, and verification of expenses.

How Mortgage Lenders Calculate Rental Income

1. Using Existing Rental Properties

If you already own rental properties, lenders will consider the net rental income rather than the total rental amount. Net rental income is calculated as follows:

For example, if you earn $2,000 per month in rental income but have $500 in expenses (property taxes, insurance, and maintenance), the net rental income is $1,500.

Most lenders apply a vacancy rate deduction of 25%, meaning they only consider 75% of the rental income to account for potential tenant turnover or vacancies.

2. Using Future Rental Income (Subject Property Income)

If you are purchasing a multi-family property or investment home, lenders may allow you to use future rental income to qualify. This requires:

  • A signed lease agreement
  • A rental appraisal (Form 1007)
  • Proof that the rental income meets or exceeds loan obligations

Loan Types That Allow Rental Income for Qualification

1. Conventional Loans (Fannie Mae & Freddie Mac)

Conventional lenders follow guidelines set by Fannie Mae and Freddie Mac:

  • Up to 75% of rental income can be used.
  • Tax returns (Schedule E) from the last two years are required.
  • Lease agreements and rental appraisals may be necessary for future rental income.

2. FHA Loans

The Federal Housing Administration, AKA, the FHA allows rental income for loan qualification under specific conditions:

  • The property must be owner-occupied (for multi-family units, one unit must be the borrower’s primary residence).
  • Two years of rental income history (unless purchasing a multi-unit property with a new lease agreement).
  • 85% of rental income can be used in calculations.

3. VA Loans

Veterans and active military personnel can use rental income for VA loans, but conditions include:

  • The rental income must be documented with lease agreements.
  • The borrower must demonstrate a history of managing rental properties.

4. DSCR Loans (Debt Service Coverage Ratio Loans)

For investors with multiple rental properties, DSCR loans qualify borrowers based on rental income alone. These investment property loans do not require traditional income verification, making them ideal for self-employed investors.

Common Lender Requirements

To use rental income for a mortgage, borrowers typically need to provide:

  • Lease Agreements: Signed contracts showing monthly rent amounts.
  • Tax Returns: Schedule E (Supplemental Income and Loss) from the past two years.
  • Rental Appraisal (Form 1007): Required for future rental income estimates.
  • Proof of Property Expenses: Documents for property taxes, insurance, and repairs.

Challenges of Using Rental Income for a Mortgage

1. Income Variability and Vacancy Rates

Rental income is not guaranteed, and lenders factor in vacancies by reducing the eligible income percentage. A property sitting vacant for months can impact cash flow and loan eligibility.

2. Tax Deductions Lowering Reported Income

Investors often write off property expenses, depreciation, and mortgage interest, which can reduce taxable income on Schedule E. While great for tax savings, this may lower the qualifying income for mortgage approval.

3. Lender-Specific Guidelines

Some lenders have stricter DSCR requirements or require higher credit scores when considering rental income. It’s essential to shop around for investment-friendly mortgage lenders.

Strategies to Improve Mortgage Approval with Rental Income

1. Improve Your DSCR

A higher DSCR (Debt Service Coverage Ratio) makes you a more attractive borrower. A DSCR above 1.25 (meaning rental income covers 125% of debt obligations) improves approval chances.

2. Keep Clean Financial Records

Maintain detailed documentation of rental income, expenses, and leases. Lenders prefer borrowers with transparent financial records.

3. Minimize Rental Property Tax Deductions

While tax deductions help reduce taxable income, limiting them slightly can present a higher net income for lenders, increasing mortgage eligibility.

4. Work with Investment-Specialist Lenders

Some lenders specialize in real estate investment financing and offer flexible DSCR-based loan options that don’t require personal income verification.

So, can you use rental income to qualify for a mortgage? Absolutely—but with conditions. Lenders require proof of steady rental income, apply vacancy deductions, and demand detailed financial documentation. Investors and homeowners looking to leverage rental earnings should be prepared with lease agreements, tax returns, and rental appraisals.

By understanding lender requirements, improving DSCR, and maintaining accurate financial records, borrowers can maximize their chances of using rental income to qualify for a mortgage and expand their real estate portfolios.

References:

Fannie Mae. (2025). Using Rental Income to Qualify for a Mortgage. Retrieved from https://www.fanniemae.com

Investopedia. (2025). Debt Service Coverage Ratio (DSCR) Loans Explained. Retrieved from https://www.investopedia.com

 

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