When you apply for a mortgage and own rental property, the underwriter doesn't simply add your full lease amount to your income. Instead, lenders follow specific industry formulas to account for vacancies, maintenance, and operating expenses. Understanding these mechanics helps you prepare documentation and set realistic expectations before you start an application.
The 75% rule: industry standard for rental offset
Most loan programs apply a 75% factor to the gross monthly rent. If a property rents for $2,000 per month, the underwriter credits you with $1,500 in qualifying income. The remaining 25% is a blanket allowance for vacancy periods, repairs, property management, insurance, and other carrying costs. This is a guideline, not a tax deduction—your actual expenses may be higher or lower. Consult a CPA or attorney; this is not tax or legal advice.
Documentation: current lease or Form 1007
To establish the rental figure, you'll provide one of two things. If the property already has a tenant, submit a signed lease showing the monthly rent and term. The underwriter verifies the tenant is not a family member and that the lease will remain in effect after closing. If the property is vacant or you're purchasing it as an investment, the appraiser completes Form 1007—the Single Family Comparable Rent Schedule—which estimates fair market rent based on recently leased comparables in the neighborhood. That 1007 figure then receives the 75% haircut.
When Schedule E history is required
For properties you've owned longer than one year, many programs also require Schedule E from your most recent tax return. The underwriter averages the net rental income (or loss) shown across twelve or twenty-four months and compares it to the lease-based calculation. If Schedule E shows a loss, that loss is added to your monthly debt obligations, even if the current lease would otherwise offset the PITI. If it shows positive cash flow, the underwriter takes the lower of the tax figure or the 75%-of-rent figure. For newly acquired rentals—purchased or converted within the past twelve months—the lease or 1007 alone typically governs, because no full-year tax history exists yet.
Investment-property cash flow is treated differently
Unlike primary-residence DTI, where the lender compares all debts to your gross income, rental properties are usually evaluated on a per-property basis. The PITI on that property must be offset by the rental income (or absorbed as a loss). Your reserves—months of PITI held in cash or investments—also carry more weight; many programs require six to twelve months for each financed rental. Because reserve and documentation requirements vary by loan type, portfolio overlay, and the number of financed properties you already own, early conversation with your loan team prevents surprises during underwriting.
The Alliance take
Rental income can strengthen your buying power, but the 75% offset and Schedule E reconciliation mean the benefit is smaller than the headline rent figure. Gather current leases, two years of tax returns including all schedules, and recent bank statements showing reserves before you apply. That upfront clarity keeps timelines predictable and helps the underwriter build the strongest possible file on the first pass.
Rates illustrative and subject to change; may not be available at commitment or closing; not a commitment to lend.