Fannie Mae Changes Rental Income Guidelines for Departing Residences

Turning your current home into a rental used to create an annoying chicken-and-egg problem when qualifying for a conventional mortgage.

You wanted to buy the new house and rent the old one. The lender wanted proof that the old house had already been rented. Borrowers were often asked for an executed lease, evidence of a security deposit and proof that the first month's rent had been collected before the rental income could help them qualify.

Fannie Mae's current departing residence guidelines make the process considerably cleaner. For a qualifying departing residence, a lease agreement is not required and, in fact, Fannie Mae does not permit the lender to use one to determine the rental income. Instead, the lender can establish market rent using an appraisal with market rents, including a Single-Family Comparable Rent Schedule, better known as Form 1007. Fannie Mae also permits certain market-rent analysis tools.

For many conventional borrowers, Form 1007 is the important part. You can potentially qualify using the market rent on your existing home before you have found a tenant, signed a lease, collected a security deposit or received the first month's rent.

Fannie Mae's broader rental income update also addresses property management experience, recently purchased investment properties and how positive rental income is treated.

The Biggest Change: You Do Not Need to Rent Your House Before Buying the Next One

The most useful application is the homeowner who wants to keep a current primary residence rather than sell it.

Suppose you own a home in Texas with a 3.5% mortgage rate. You have substantial equity, the home would make a good rental, and you want to buy a larger house. Selling the existing property simply to qualify for the next mortgage may be the last thing you want to do.

Under Fannie Mae's departing residence guidelines, the lender can establish market rent without waiting for you to become a landlord first.

For a typical single-family home, the process can be relatively simple:

• Order Form 1007. An appraiser determines supported monthly market rent using comparable rental properties in the area.
• Use 75% of the supported market rent. Fannie Mae applies a 25% vacancy and expense factor when calculating usable rental income.
• Compare the resulting rent with PITIA. PITIA includes principal, interest, taxes, insurance and applicable association dues on the departing residence.
• Use the rent to offset the old housing payment. If the calculation covers the full PITIA, the old mortgage can effectively stop hurting the borrower's debt-to-income ratio.

No tenant has to move in first. No security deposit needs to hit your bank account. No first month's rent needs to be collected simply to prove the rental plan is real.

For borrowers using conventional financing, this can make keeping a low-rate existing mortgage much easier.

How the Form 1007 Rental Income Calculation Works

The math is straightforward.

Imagine a homeowner in Colorado is leaving a Denver property with a $3,000 monthly PITIA. Form 1007 supports monthly market rent of $4,000.

Fannie Mae uses 75% of the market rent:

$4,000 × 75% = $3,000

The $3,000 of usable rental income offsets the entire $3,000 payment on the departing residence.

The borrower is still responsible for the mortgage, of course. From a conventional underwriting perspective, however, the rental income has neutralized that housing obligation when calculating the borrower's DTI.

Now assume Form 1007 supports $4,500 of rent:

$4,500 × 75% = $3,375

After subtracting the $3,000 PITIA, the property appears to have $375 of positive adjusted rental income. For a departing residence, Fannie Mae only allows the rental income to offset the PITIA. The extra $375 cannot be added to the borrower's qualifying income.

For most move-up buyers, eliminating a $3,000 mortgage payment from DTI is already the bigger win.

Why This Matters So Much for Homeowners With Low Mortgage Rates

Keeping an old house has become more attractive for homeowners whose existing mortgage rate is substantially below current market rates.

A homeowner in Florida may own a Tampa home financed at 3.25% and want to relocate to South Florida. A borrower in New Jersey may want to keep a Hoboken condo while purchasing a house in the suburbs. An owner in Illinois may want to rent a Chicago property rather than sell it when moving to the North Shore.

Previously, qualifying for the new home could create a timing headache. If the old mortgage pushed DTI too high, the borrower might feel pressured to find a tenant and execute a lease before the new purchase could close.

The Form 1007 approach removes much of that friction.

A borrower can potentially:

• Keep the existing low-rate mortgage. There is no need to refinance or sell solely because the payment initially appears in DTI.
• Buy the next home before finding a tenant. Market rent can be established independently of an executed lease.
• Avoid rushing the rental process. The homeowner does not need to accept the first tenant available simply to satisfy mortgage underwriting.
• Preserve a potentially valuable investment property. A home purchased years ago may have significant equity, attractive financing and strong rental potential.

The rule does not automatically mean everyone should become a landlord. It gives homeowners another option instead of making a sale the default answer.

Property Management Experience Still Matters

Fannie Mae makes an important distinction between using rent to eliminate a property's payment and using rental profits as additional income.

Borrowers generally need 12 full months of property management experience before positive rental income can be used to increase qualifying income in scenarios where Fannie Mae permits positive rental income.

The practical distinction is:

• Less than 12 months of experience: Rental income may still offset the applicable property expense, but positive income can be restricted.
• 12 months or more of experience: Positive qualifying rental income may be available in eligible scenarios when the documentation supports it.
• Departing residence: Positive income is limited to offsetting the full PITIA regardless. The departing residence does not become a source of additional positive qualifying income.

The updated Fannie Mae guidance specifically created a separate framework for departing residences based on market-supported rents, reserves and PITIA-offset limitations rather than lease agreements.

New Landlords Need to Pay Attention to Reserves

There is one additional requirement that can catch move-up buyers by surprise.

If you are converting your current residence into a rental and have less than 12 months of property management experience, Fannie Mae requires 6 months of PITIA reserves for the departing residence. Those reserves are in addition to other reserve requirements that may apply.

Suppose the old home's PITIA is $4,000 per month. You would need:

$4,000 × 6 = $24,000 in additional reserves

The $24,000 is not paid to the lender. It generally needs to remain available after closing.

This becomes especially important for borrowers making a larger down payment or using a jumbo loan for the next property. Putting another $50,000 into the down payment may accomplish very little if doing so leaves the borrower short of the reserves needed to keep the departing residence.

Running the numbers before making an offer avoids that problem.

The 45-Day Rule for Recently Purchased Investment Properties

Fannie Mae also treats recently acquired investment properties differently.

If an investment property was purchased within 45 days of the subject property transaction, a lease agreement cannot simply be used to establish the rental income. Fannie Mae created separate eligibility, documentation and income-calculation rules for these properties.

This can matter for an active investor who buys a rental and then quickly applies for another conventional mortgage.

The major characteristics are:

• Timing matters. A property purchased within the 45-day window receives special treatment.
• The new lease is not enough. Market-supported rental documentation is required instead of simply relying on the lease.
• Positive income may be limited. The rental can help offset its housing expense without necessarily increasing the borrower's qualifying income.

For someone buying one rental every few years, the rule may rarely come up. For investors accumulating properties quickly, mortgage sequencing becomes much more important.

ADU Rental Income Can Help With a Conventional Mortgage

Fannie Mae also allows eligible income from an accessory dwelling unit, or ADU, to help a borrower qualify.

A homeowner may have a detached guest house, converted garage or backyard unit producing meaningful rental income. Fannie Mae can allow that income to support qualification, but ADU rental income is limited to 30% of the borrower's total qualifying income.

The limitation means ADU rent is designed to supplement the borrower's qualification rather than carry the mortgage by itself.

For borrowers in expensive housing markets, however, even $1,000 or $2,000 of additional qualifying income can meaningfully change how much home they can purchase.

Conventional Financing Just Got More Flexible for Move-Up Buyers

These guidelines matter because they solve a very common conventional mortgage problem.

A homeowner should not necessarily have to sell a perfectly good property simply because the mortgage lender needs to account for the old payment. Nor should someone have to rush to find a tenant, collect a security deposit and receive the first month's rent before being able to buy the next house.

For a qualifying departing residence, Form 1007 can provide the market-rent documentation needed to make the calculation work.

The biggest advantages are straightforward:

• No executed lease is required for the departing residence. Fannie Mae expressly does not permit one to be used to establish the rent.
• No security deposit or first month's rent is needed to establish the market rent. The lender can rely on supported market rent instead.
• The old PITIA can potentially be fully offset. Seventy-five percent of supported rent is compared with the existing housing expense.
• You can buy before becoming a landlord. The rental and home-purchase timelines no longer need to line up perfectly.

Individual lenders can still impose overlays, so lender selection matters. A lender may ask for additional documentation even when Fannie Mae does not require it.

What If You Want to Sell the Home Instead of Rent It?

Keeping the current property is not always the right move. Some homeowners want the equity for the next purchase, do not want to become landlords or simply prefer to sell once they have moved out.

The challenge is that buying and selling on exactly the same timeline is difficult. You may find the next home before the current one sells, need equity from the existing property for the down payment or have trouble qualifying while both mortgage payments are being counted.

A Buy Before You Sell program can create another path.

Depending on the transaction, homeowners may be able to:

• Purchase the next home before the existing sale closes. The move does not have to depend on perfectly synchronized closings.
• Access existing home equity. A bridge loan can provide funds for the next down payment and closing costs before the old property is sold.
• Make a cleaner offer. Removing a home-sale contingency can make the new purchase more competitive.
• Move first and sell afterward. The homeowner can prepare and list the old property after moving instead of trying to do everything at once.

For move-up buyers, this creates two very different but useful strategies. If you want to keep the old home, Form 1007 may allow market rent to offset the PITIA without first finding a tenant. If you want to sell it, Buy Before You Sell or bridge financing can provide time to purchase first and sell afterward.

Why Working With a Mortgage Broker Matters

Fannie Mae establishes the baseline rules for conventional mortgages, but lenders can still impose their own overlays.

One lender may follow the Form 1007 departing residence guidelines cleanly. Another may ask for additional documentation, require more reserves or create hurdles that are not necessary under the underlying Fannie Mae guideline.

The bigger question is also not always whether the departing residence can be rented. It is which strategy makes the most sense.

LendFriend Mortgage can compare several paths before the borrower commits to one:

• Keep the existing home and use Form 1007 rental income to offset PITIA.
• Sell the property after buying through a Buy Before You Sell structure.
• Use a bridge loan to access equity for the next purchase.
• Compare conventional financing with jumbo or other mortgage options when the new purchase requires a different structure.

The goal is not simply finding a lender willing to approve the mortgage. It is figuring out whether keeping, renting or selling the old house creates the strongest overall transaction.

The Bottom Line

The most important part of Fannie Mae's rental income guidelines is not some complicated new rental formula. It is that homeowners converting a primary residence into a rental have a much cleaner path to qualifying for the next home.

For a departing residence, you do not need to have a tenant lined up first. Fannie Mae does not permit the lender to use a lease agreement to establish the rent. A Form 1007 can instead establish supported market rent, allowing 75% of that rent to offset the existing PITIA.

For homeowners sitting on low mortgage rates in Texas, Florida, Colorado, New Jersey, Illinois and elsewhere, that can completely change the decision around whether the current house needs to be sold.

Before listing a home simply because you think carrying two mortgages will prevent you from qualifying, run the departing residence calculation first. Keeping the house may be much easier than it used to look.