Most mortgage applications fall apart for one reason: mistakes in calculating rental income. Even a small error can turn an approval into a denial or make a loan unsellable to investors. This is especially important when working with agencies like Fannie Mae, which reported $4.3 trillion in total assets in 2025.
For underwriters, getting rental income right isn’t just about math—it’s about following the rules. When rental income is calculated correctly, loan files are stronger, safer, and more likely to be approved. It also helps borrowers reach their goals with fewer delays.
Main takeaways from this article:
- To calculate rental income, lenders need the right documents and must follow each agency’s rules.
- Fannie Mae, Freddie Mac, and FHA all use different vacancy rates and add-back rules, so it’s important to follow their guidelines carefully.
- Use leases, appraiser rent forms, or tax returns to figure out qualifying rental income. Only add back expenses that the agency allows.
- Common mistakes—like forgetting the vacancy factor or using the wrong PITIA—can slow down or stop a loan.
- IncomeXpert helps lenders avoid errors by automating rental income calculations and keeping files consistent.
What is rental income, and how is it categorized?
Rental income is money a borrower earns from renting out a property they own. To calculate it correctly, underwriters must place the property in the right category based on how it’s used and who owns it. This matters because each category follows different rules.
Accurate rental-income calculations make a big impact. For example, Fannie Mae helped more than 1 million households in the first nine months of 2025—showing how important correct underwriting is.
Why categorization matters
How you calculate rental income depends on whether the property is:
- The property being financed
- A primary home with extra rental units
- A separate investment property
- Owned by the borrower or owned through a business
Using the wrong category can lead to incorrect income numbers and increase repurchase risk.
Underwriter Alert: Classifying a property incorrectly can cause major mistakes in the income calculation and potential repurchase risk. |
What rental income is used for in underwriting
In underwriting, rental income is used in two ways:
- To increase qualifying income (if the property earns money)
- To offset the mortgage payment on rental properties
Underwriters review rental income carefully and use conservative numbers to allow for vacancies or unexpected expenses.
Learn more about complex income scenariosRental income is just one of many tricky income types that can impact a loan file. If your team needs help understanding other challenging income categories, these guides offer clear explanations and examples. |
How to calculate rental income (the core math)
To calculate rental income correctly, underwriters follow a few basic steps. These steps help show how much money the property actually earns after vacancies and expenses.
1. Calculate gross rental income (GRI)
Start with the monthly rent from the lease or the appraiser’s rent estimate.
Multiply it by 12 to get the annual gross rental income. This gives you the starting point for all other calculations.
2. Apply vacancy factor
Most agencies assume the property will not be rented 100% of the time. They usually require a 25% vacancy factor.
- Vacancy Loss = Gross Annual Rent × 0.25
- Adjusted GRI = Gross Annual Rent − Vacancy Loss
This reduces income to account for months without tenants.
3. Calculate net operating income (NOI)
From the adjusted GRI, subtract the property’s yearly operating expenses, such as:
- Property taxes
- Insurance
- Maintenance
- HOA dues
- Management fees
What’s left is the net operating income (NOI) before the mortgage payment.
4. Calculate cash flow
Use this formula:
Cash Flow = NOI − Annual Mortgage Payments (P&I only)
Positive cash flow means the property supports itself. Negative cash flow means the borrower must use their own income to cover the shortage.
Important note: Cash flow is not used directly for agency underwriting, but helps underwriters understand the property’s financial health.
Agency-specific rules (Fannie Mae, Freddie Mac, FHA)
Each mortgage agency has its own rules for how rental income must be documented and calculated. Underwriters must follow these rules carefully to make sure the income is accurate and acceptable for qualification.
Fannie Mae rental income rules
Fannie Mae allows different ways to calculate rental income depending on the property and the documents available:
- For subject property purchases, use Form 1007 or Form 1025 (the appraiser’s rent schedule).
- For existing rental properties, use Schedule E from the borrower’s tax returns.
- Apply a 25% vacancy factor to all rental income.
- When using Schedule E, add back depreciation, mortgage interest, taxes, and insurance, then subtract the current PITIA.
When using Schedule E, add back depreciation, mortgage interest, taxes, and insurance to the net figure, then subtract current PITIA.
Freddie Mac rental income rules
Freddie Mac focuses on consistent documentation and offers clear guidance:
- Use Form 70/998 or Form 72 for market rent estimates.
- For tax-return rental income, use similar add-backs as Fannie Mae.
- Review both short-term and long-term rental history for stability.
- Freddie Mac allows two methods for calculating rental income:
- Property-level offset (calculate each rental separately)
- Global rental income (combine all rentals into one calculation)
FHA rental income rules
FHA typically requires a two-year history of FHA rental income documented on tax returns. Their specific guidelines include:
- Usually requires two years of rental income on tax returns.
- Uses a vacancy factor based on local market conditions.
- Requires a detailed operating income statement for each property.
- FHA has its own rental-income worksheets, and each property must be analyzed separately.
See how Blueprint improves rental income accuracyDifferent agencies require different rental income calculations, vacancy factors, and add-backs. Blueprint applies these rules automatically so your team stays accurate and consistent across every file. |
How to calculate rental income by property scenario
Rental income calculations change depending on the type of property. Underwriters must use the correct method for each scenario to make sure the income is accurate and meets agency rules.
2–4-unit primary residence
When a borrower lives in one unit and rents the others, calculate primary residence rental income from the non-owner units:
- Use 75% of the gross rent from the rental units.
- Add that amount directly to the borrower’s qualifying income.
- The full PITIA for the property is still counted as a housing expense.
This method helps borrowers qualify for multi-unit homes while recognizing the rental income they receive.
Subject rental property (purchase or refinance)
These rules apply when the property being reviewed is the same one being bought or refinanced.
For a purchase:
- Use the lower of the market rent (Form 1007) or the actual lease amount.
- Apply a 25% vacancy factor.
- Subtract the full PITIA from the adjusted income.
For a refinance:
- Use Schedule E if the property is already on tax returns.
- If the borrower recently bought the property, use the current lease.
- Apply the agency’s rules to determine the net rental income.
Non-subject rental properties
These are rental properties not part of the current loan.
- Review Schedule E for each property.
- Add back allowable non-cash expenses like depreciation.
- Subtract the property’s current PITIA.
- Add up all the net amounts from each property.
This shows the borrower’s total rental income impact across their full portfolio.
Mixed portfolios
When borrowers own several rental properties:
- Calculate the rental income for each property separately.
- Do not double-count expenses or income.
- Use the same time period for all calculations.
- Add up the final net income to use in the borrower’s qualification.
How to calculate rental income from Schedule E
Schedule E on a borrower’s tax return shows how their rental property performed in the past. Underwriters can use this information to calculate qualifying rental income.
Here’s how to do it:
- Start with “Rents received” (Line 3).
- Subtract all expenses except depreciation, mortgage interest, taxes, and insurance.
- Add back those excluded expenses (depreciation, interest, taxes, insurance).
- Subtract the current PITIA for the property.
- If the borrower owned the property for less than a year, divide by the number of months owned.
Schedule E calculation formula: (Net Rental Income + Depreciation + Mortgage Interest + Taxes + Insurance) ÷ Months of Service − Current PITIA
Schedule E Tip: Look for one-time expenses—such as major repairs—that may have made income look lower than normal. |
How to calculate rental income from Form 8825 (entity-owned properties)
When rental properties are owned through partnerships or S-corporations, Form 8825 documents the rental activity. It shows the property’s rents, expenses, and overall performance. Underwriters can use this information to calculate the borrower’s share of rental income.
Here’s how to do it:
- Find the property on Form 8825.
- Identify the total rents and total expenses.
- Add back non-cash expenses like depreciation.
- Apply the borrower’s ownership percentage from their K-1.
- If the borrower is personally responsible for the loan, subtract their portion of the PITIA.
Even though entity-owned properties add a few extra steps, the core idea is the same: add back non-cash expenses and calculate the borrower’s true share of income.
Required rental-income forms and when to use them
Each agency requires specific forms to document rental income:
Fannie Mae:
- Form 1037: Operating Income Statement
- Form 1038: Rental Income Worksheet
- Form 1039: Rental Income Calculator
Freddie Mac:
- Form 92: Rental Income Analysis Form
These forms standardize the calculation process and ensure proper documentation for loan approval and potential audits.
Common rental-income calculation mistakes
Rental-income errors can cause major problems in underwriting. Here are the most common issues to watch for:
- Skipping the vacancy factor: Not reducing rent by 25% makes income look higher than it really is.
- Incorrect add-backs: Only depreciation, mortgage interest, taxes, and insurance can be added back—nothing else.
- PITIA mismatch: Using old mortgage payments instead of the current PITIA creates inaccurate results.
- Mixed documentation: Combining tax returns with year-to-date numbers leads to incorrect income calculations.
- Double-counting: Adding the same income or expense more than once inflates or distorts the final number.
Avoiding these mistakes helps underwriters calculate rental income correctly and prevents delays in the loan process.
Make rental income reviews faster and more accurateIncomeXpert automates agency-specific rental income calculations, flags inconsistencies, and produces audit-ready documentation so your team can focus on real risk—not manual math. |
Streamline rental income with IncomeXpert
Getting rental income right is one of the most important parts of underwriting. When underwriters use the correct documents, apply agency rules, and follow the proper calculation steps, they can avoid delays, reduce defects, and help borrowers qualify with confidence.
Rental income can be complex, but the right tools make it easier. IncomeXpert applies Fannie Mae, Freddie Mac, and FHA rules automatically, catches mistakes early, and keeps every file consistent and audit-ready.
If your team wants faster reviews, fewer errors, and more reliable calculations, IncomeXpert can help you get there. Request a demo today.
FAQs about rental-income calculation
What is the 50% rule for calculating rental income?
The 50% rule is a quick estimate saying that about half of the rent collected will be used for operating expenses like taxes, insurance, and upkeep. It’s helpful for investors, but lenders cannot use it for mortgages. Underwriters must follow agency guidelines and calculate rental income using real numbers from leases, appraisals, or tax returns—not estimates.
What is the best way to calculate rental income?
The best way to calculate rental income is to start with the monthly rent, subtract a vacancy allowance, and then remove operating expenses like taxes, insurance, and maintenance. This gives you the property’s net income. Lenders also look at documents like leases, appraisals, and tax returns to confirm the numbers and make sure the income is stable.
What is the 30% income rule for rent?
The 30% income rule is a simple guideline saying renters should spend no more than 30% of their monthly income on housing. It helps people understand what they can afford, but lenders do not use this rule for mortgages. Instead, they use debt-to-income ratios and verified income to determine qualification.
How to calculate rent revenue?
To calculate rent revenue, multiply the monthly rent by 12 to get the yearly amount. If you want a more accurate number, subtract the expected vacancy time. This total shows how much money the property brings in before expenses like taxes, insurance, and repairs are taken out.