Over the last few days we have been putting the final touches on our 2018 underwriting training courses launching March 2nd.  While I was reviewing the rental income course I realized we did not provide enough information in one key area.  There is a difference for rental income generated from a primary residence on a conventional loan versus a rental property.  To make sure we keep our training the best on the market, we created additional content for the training library just for this topic.

Training Library Update

Our audit reviews show most underwriters properly interpret FNMA/FHLMC guidelines on when you can use income for a primary residence which is:

  • When the primary is a 2-4 unit
  • When the primary is a SFR and meets the “live in aide” requirement
  • SFR when as a compensating factor on programs such as FNMA Home Ready


The error we find, and why we felt it was important to create the additional training video, is in the math.  When reviewing files in audit we have seen underwriters using the same method used on investment properties to credit the borrower with the rental income.  But that is not the proper method, let me demonstrate the subtle difference that can make or break a files DTI.

First you follow the standard rental income guidelines and determine if you are going to use Schedule E or a lease.  Then calculate the gross rental income based on the method, this is where you stop.  If you if you complete the next step, which is to subtract the PITI from that gross rental you will make an error.  Look at this example below based on a 2-unit property shown as a primary residence versus a rental property.  Keep in mind we used the same rental income of $2,000 just to demonstrate the difference, we understand you would not have the same $2,000 coming in for one unit as you would for two units.  The focus here is on the math:

Using A Lease
Primary Residence                          Vs                           Investment Property

$2,000                                                                                   $2,000

X 75%                                                                                    x 75%

= $1,500                                                                               = $1,500

N/A                                                                                        $1,000 subtract PITI

$1,500 Net Rental Income                                            $500       Net Rental Income



The reason you don’t subtract the PITI when the rental income is from the primary is the borrower must always be able to afford their own primary residence.  Said in another way regardless if you have a renter or not, you must pay the full mortgage.  In comparison an investment property we are only considering the net income or loss, not the PITI.  For rental income on a primary what ever “net” income you have does not “offset” the PITI but instead is treated more like a second job income (which is just added to the total income) see this chart below on how we “finish” the math!

Primary Residence                          Vs                           Investment Property

$5,000 Employment Income                                        $5,000 Employment Income

$1,500 Rental Income                                                     $500       Rental Income

$6,500   Total Income                                                      $5,500   Total Income


$1500    Primary Residence Payment                       $1500    Primary Residence Payment

$500       Loans                                                                    $500       Loans

$2,000   Total Debts                                                         $2,000   Total Debts

23.08 / 30.77 Ratios                                                         27.27 / 36.36 Ratios        


Hopefully this gives a good picture on the difference between rental income analysis on a primary versus rental income analysis on an investment property.