The Veridian Blog

Conservative lenders will disallow the use of rental income unless it is reported on your Schedule E of your 1040 tax return for at least one year.  Unfortunately, this is the way the trend is moving.  Already in the last two years, Fannie Mae has issued guidelines prohibiting the use of rental income unless the borrower can show a minimum of 30% equity in the rental property.  In some cases, lenders even require appraisal reports for the property (in addition to one for the subject property)! 

If you are able to find a lender that allows use of rental income without a Schedule E history, you would still have to adhere to other rental income guidelines.  In addition to having to put down at least 30%, you will also have to provide a fully executed rental agreement (which has always been the case), as well as proof of receipt of the security deposit (bank receipt or bank statement).  It obviously has to be an arm's length transaction - meaning no family members as tenants.  Finally, the rental amount has to be consistent with the average customary rent charged for a similar unit in the neighborhood before being discounted at a standard occupancy rate of 75%.

The biggest hurdle is the initial Schedule E requirement.  Lenders are preventing applicants from using unproven rental income "in a pinch" that would help them qualify for loans they may otherwise not be able to secure.