Fannie Mae is giving loan originators a new way to document projected rent from a borrower’s departing residence, creating an alternative to an appraiser-completed rent schedule that Freddie Mac does not currently offer.
Under rental-income guidelines published earlier this month, Fannie Mae no longer permits lenders to use a lease agreement to establish rental income from a departing residence — the borrower’s current primary home that will be converted into an investment property after the purchase of a new residence.
Instead, the lender must establish the property’s market rent using an appraisal, a Single-Family Comparable Rent Schedule, commonly known as Form 1007, or a market-analysis tool supported by at least three comparable rentals.
Lenders may adopt the changes immediately and must apply them to loans with application dates on or after Nov. 1.
For originators, the new approach could remove the need for a borrower to secure a tenant before qualifying for the next home. It could also avoid a separate Form 1007 in eligible departing-residence files when sufficient market data are available.
But the projected rent cannot be used without limits. Fannie requires the lender to apply a 25% reduction for vacancy and operating expenses, subtract the departing property’s principal, interest, taxes, insurance, and association dues, and then determine whether the result is positive or negative.
Any positive amount may be used only to offset the departing residence’s housing payment. It cannot be added to the borrower’s qualifying income. Any shortfall must be included in the borrower’s debt-to-income ratio.
What Originators Must Document
Fannie Mae allows lenders to determine the gross market rent for a departing residence using one of three options:
- A complete appraisal report that includes market rents;
- Form 1007 for the borrower-occupied unit; or
- A market-analysis tool such as Zillow, Redfin, or MLS data.
When a market-analysis tool is used, the lender must obtain at least three comparable rental properties, preferably within the same market area, subdivision, or project. The lender must retain all documentation used to determine the rent in the loan file.
For a multi-unit departing residence, the market analysis should cover only the unit previously occupied by the borrower. Rental income from the other units is evaluated under Fannie Mae’s separate rules for non-subject properties.
A lease agreement cannot be substituted for that documentation.
The change replaces a lease-dependent process with one built around market-supported rent. For a borrower who wants to retain a current home but has not yet found a tenant, that can remove a significant timing obstacle.
It does not eliminate the need for a realistic rent estimate. If comparable properties do not support enough rent to cover most of the existing mortgage payment, the remaining obligation will still count against the borrower.
How The Rent Enters The Calculation
The lender begins with the documented monthly market rent and multiplies it by 75%. The remaining 25% accounts for vacancy and operating expenses.
The lender then subtracts the full PITIA for the departing property.
For example, assume the supported market rent is $2,500 per month:
- Gross market rent: $2,500
- Rent after 25% reduction: $1,875
- Departing-property PITIA: $1,700
- Remaining positive rent: $175
That $175 cannot be added to the borrower’s income. It simply means the full $1,700 housing payment may be offset for qualifying purposes.
If PITIA were $2,000, the resulting $125 shortfall would be included in the borrower’s monthly obligations.
The new calculation could help some move-up buyers qualify without selling their current home first. But it does not turn projected rent into unrestricted additional income.
Reserves May Become The Next Hurdle
The guidelines also tie reserve requirements to the borrower’s property-management experience.
If the borrower has less than 12 months of documented experience managing rental property, the lender must verify six months of reserves covering the departing residence’s PITIA. Those funds are required in addition to any reserves that may apply because the borrower owns multiple financed properties.
Borrowers with at least 12 months of qualifying property-management experience are not subject to that additional departing-residence reserve requirement, although other reserve rules may still apply.
That gives originators another item to evaluate before presenting the departing-residence strategy as a solution. A borrower may have sufficient projected rent to offset the old mortgage but lack the liquid assets needed to satisfy the reserve requirement.
The Form 1007 Option Is Not Disappearing
Fannie Mae’s changes do not eliminate Form 1007 across conventional lending.
The form remains required when rental income from a one-unit subject investment property is used to qualify the borrower. It also remains an option for departing residences when a lender chooses not to rely on a market-analysis tool.
Fannie has created an alternative documentation pathway for specific situations, not a blanket replacement for appraiser-supported rent analysis.
Different rules also apply to short-term rentals. For a one-unit subject property operated as a short-term rental, lenders may use Form 1007 based on conventional long-term rents or validated short-term-rental data obtained from an MLS or property-management company. That data must include three comparable properties, rental rates, the number of days rented during the previous calendar year, and relevant factors affecting short-term use.
Fannie applies a 50% reduction to gross short-term-rental income when calculating adjusted net rental income, rather than the 25% reduction used for departing residences.
Freddie Mac Takes A Different Approach
Freddie Mac also allows projected rent from a primary residence being converted into an investment property, but its documentation rules differ from Fannie Mae’s new framework.
Under Freddie Mac’s current Seller/Servicer Guide, a lender uses 75% of the gross monthly rent shown on a lease when a lease is available. When the property is not yet rented, and no lease is available, the lender may instead use the gross monthly market rent reported on Form 72 or Form 1000, depending on the property type.
That means a tenant does not always have to be in place for a Freddie Mac loan. But unlike Fannie Mae’s new departing-residence policy, Freddie’s guide does not expressly allow a lender to substitute Zillow, Redfin, or another market-analysis tool for an appraiser-supported rent estimate.
The treatment of positive rental income can also differ. Under Freddie Mac’s rules, a borrower’s property-management experience helps determine whether rental income exceeding the property’s monthly payment may be added to qualifying income or limited to offsetting the housing expense.
Originators therefore cannot treat the Fannie Mae change as a uniform conventional-loan rule. The documentation, income treatment, and reserve requirements should be checked against the intended GSE before the borrower relies on projected rent to qualify.
Valuation Vendors Move Into The Opening
Valuation vendors are beginning to build around Fannie Mae’s expanded use of market-analysis tools for departing residences.
Clear Capital on Tuesday announced enhancements to its Rental AVM, which produces an automated market-rent estimate, ranked rental comparables, and a confidence score in less than a second.
The company said expanded rental data increased the model’s coverage by more than 10% to approximately 105 million properties. Clear Capital reports a 3% median absolute percentage error, meaning its estimates differed from actual rents by a median of approximately 3% in company testing.
“Rental AVM gives lenders a consistent, model-governed rent estimate they can act on immediately, whether they’re qualifying a loan, underwriting a file, or evaluating a portfolio,” said Erica Vigen, product director of analytics at Clear Capital.
Clear Capital also markets Rental AVM for DSCR prequalification, investor-loan screening, and portfolio analysis. Acceptance in those workflows depends on each lender’s and investor’s guidelines.
A New Conversation With Move-Up Buyers
The rule creates a potential opening for borrowers who want to buy another home without immediately selling the one they already own.
That does not make every current homeowner a viable landlord. The originator still has to evaluate the market rent, existing payment, reserves, property-management history, and the borrower’s ability to carry any remaining shortfall.
But the borrower no longer has to produce a lease that Fannie Mae will not accept for this purpose. And where sufficient comparable-rent data are available, the lender may not need to wait for a separate appraiser-completed rent schedule.
For LOs, the opportunity is to identify the scenario early. A borrower who assumes the current home must be sold — or rented before applying — may have another path. The numbers still have to work, but the documentation no longer has to wait for a tenant.
