April 30, 2025

FHA Rental Income: What You Need to Know When Leaving Your Home

When considering FHA rental income departing residence, it’s essential to understand how homeowners like you can leverage rental income to finance a new home purchase. Here’s a quick snapshot to get you started:

Relocation Distance: Generally, you must move more than 100 miles away to count future rental income towards a new FHA loan.
Equity Requirement: Have at least 25% equity in your current home, validated by a professional appraisal.
Lease Agreement: A solid one-year lease is crucial to show income stability.
Rental Income Calculation: Lenders use 75% of the lesser between fair market rent or actual lease rent to account for vacancies.
Security Deposit Verification: Proof of the tenant's deposit or first month’s rent assures lenders of rental income's reliability.

Owning a home comes with its unique set of benefits, and with FHA loans, you can turn your existing property into an asset. This approach can significantly ease the transition to your next home by using rental income to qualify for a mortgage. Whether you're moving for a new job, seeking a larger space, or considering a property investment, FHA guidelines offer a pathway to achieve your residential goals.

By understanding the nuances of renting out a departing residence, you can take advantage of FHA benefits. This strategy not only helps manage dual mortgages temporarily but also builds your investment portfolio.

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Understanding FHA Rental Income Departing Residence

The 100-Mile Rule

When using FHA rental income departing residence to qualify for a new mortgage, the relocation distance is a critical factor. The FHA requires that you move more than 100 miles away from your current home to include rental income in your mortgage application. This rule ensures that the new property is your primary residence.

Why 100 Miles?

The 100-mile rule is about risk management. Lenders want to ensure that you're not just buying another investment property under the guise of a primary residence. Moving more than 100 miles usually means there's a legitimate reason, like a job change or needing more space. It shows the lender that you genuinely intend to live in the new home.

Equity Requirements

To use rental income from your departing residence, you need at least 25% equity in your current home. This equity is verified through a professional appraisal. Why is this important?

Lender Risk and Equity

Having substantial equity reduces the lender's risk. If you have more equity, it means you're less likely to default, as you have more invested in the property. The appraisal provides an accurate valuation, ensuring the equity requirement is met.

Lease Agreement

A solid lease agreement is crucial. It proves to lenders that the rental income is stable and reliable. Your lease should be for at least one year and include all tenant information. This stability is essential for mortgage qualification.

Lease Essentials

Ensure the lease term is at least one year.
Include all tenant details and rental terms.
Document the security deposit and rent conditions.

By understanding these elements of FHA rental income departing residence, you can better steer the process of using rental income to secure a new home. This knowledge helps you make informed decisions and leverage your current property to achieve your housing goals.

Calculating Rental Income for FHA Loans

When using rental income to qualify for an FHA loan, understand how lenders calculate this income. The 75% rule is a key part of this process.

Rental Income Calculation

Lenders use the 75% rule to account for potential vacancies and maintenance costs. This means they only consider 75% of the rental income when determining your mortgage eligibility. The calculation is based on the lesser of two amounts: 75% of the fair market rent or 75% of the actual rent stated in your lease agreement.

For example, if the fair market rent is $1,000 per month, but your lease states $950, lenders will use 75% of $950, which is $712.50, as your qualifying rental income.

Lease Agreement Essentials

A strong lease agreement is crucial for proving rental income stability. Lenders look for a lease term of at least one year. This shows that the rental income is consistent and reliable.

Key Elements of a Lease Agreement:

Term Length: Ensure the lease is for a minimum of one year.
Tenant Information: Include full names and contact details of all tenants.
Rent Details: Clearly state the monthly rent and due dates.
Security Deposit: Document the amount and conditions for its return.

Security Deposit Verification

Lenders require proof of the security deposit or first month's rent. This verification acts as a financial buffer, showing that the rental agreement is legitimate and the income is reliable.

Ways to Document the Security Deposit:

Bank Statements: Show the deposit transaction, noting the lease agreement as the source.
Receipts: Provide a signed receipt acknowledging the deposit.
Escrow Account Statements: If applicable, use these as proof of the deposit.

By understanding these calculations and requirements, you can steer the process of using rental income for an FHA loan with confidence. This knowledge ensures you meet lender criteria and can leverage your current home effectively.

Exceptions and Special Considerations

When it comes to FHA rental income departing residence, understanding exceptions and special considerations can make a big difference. Two key exceptions are the Multi-Unit Property Exception and the VA Loan Exception.

Multi-Unit Property Exception

If you own a multi-unit property, like a duplex, triplex, or fourplex, you might qualify for the multi-unit property exception. This exception is especially helpful if you've been a landlord, renting out one or more units while living in another.

Here's why this matters:

Landlord Experience: Owning and managing a multi-unit property shows you have experience as a landlord. Lenders like this because it indicates you know how to handle rental properties.
FHA Guidelines: The FHA recognizes that if you're already managing rental units, you're likely to keep doing so successfully. This means you might not need to follow the 100-mile rule if you're moving to a new home nearby.
Rental Income: You can use the income from the rented units to qualify for your new loan. This can be a big advantage, especially if you're purchasing another property close by.

The multi-unit property exception can simplify your mortgage process and help you leverage your rental income more effectively.

VA Loan Exception

For those eligible for VA loans, there's another helpful exception. VA loans allow you to count 100% of rental income from your departing residence. This makes it easier to qualify for a new mortgage.

VA Loans: These loans, backed by the Department of Veterans Affairs, offer favorable terms like no down payment and no PMI. They also allow for more flexibility in using rental income.
Departing Residence: If you're moving from a home you own, you can use all the rental income from that property to qualify for a VA loan. This can be especially beneficial if you're staying within the same area.

Both of these exceptions can help you manage your finances and make the most of your rental income when moving. Understanding how they work with FHA and VA guidelines is key to making informed decisions.

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Next, we'll dive into frequently asked questions about FHA rental income departing residence to clear up any lingering uncertainties.

Frequently Asked Questions about FHA Rental Income Departing Residence

Navigating FHA loans and rental income can be tricky. Here are answers to some common questions that might help clarify things for you.

Can I use rental income if relocating less than 100 miles?

In most cases, the 100-mile rule applies, meaning you need to move more than 100 miles away to use rental income from your departing residence for FHA loan qualification. This rule is in place to ensure the new property is your primary residence and not just an investment. However, if you own a multi-unit property and have experience managing rentals, you might qualify for an exception. This allows you to use rental income even if moving within 100 miles, as long as you continue to manage the rental units.

How is rental income calculated for FHA loans?

Rental income is calculated using the 75% rule. Lenders will consider the lesser of 75% of the fair market rent or 75% of the actual rent stated in your lease agreement. This reduction accounts for potential vacancies and maintenance costs, ensuring the rental income is stable and reliable. For instance, if your property's fair market rent is $1,000 but your lease states $950, lenders will use 75% of $950 to calculate your qualifying income.

What documentation is needed for rental income verification?

To verify rental income, you'll need several key documents:

Lease Agreement: A solid, one-year lease agreement is crucial. It shows the stability and continuity of the rental income.
Security Deposit Verification: Proof of the tenant's security deposit or first month's rent is vital. This can be documented through bank statements, signed receipts, or escrow account statements.
Professional Appraisal: To confirm you have at least 25% equity in your departing residence, a professional appraisal is necessary. This helps lenders assess the property's value and your equity stake.

These documents help establish the legitimacy and reliability of your rental income, making your mortgage application process smoother.

In the next section, we'll wrap up with a summary and explore how BrightBridge Realty Capital can assist you in making informed decisions about your real estate investments.

Conclusion

In summary, understanding FHA rental income departing residence rules can significantly impact your mortgage approval process. By adhering to the 100-mile relocation rule, ensuring at least 25% equity in your departing residence, and securing a solid lease agreement, you can better position yourself for FHA loan qualification. These steps help demonstrate to lenders that your rental income is stable and reliable, which can be a crucial factor in securing your next home.

At BrightBridge Realty Capital, we specialize in providing customized real estate financing solutions that cater to your unique needs. Whether you're navigating FHA guidelines or exploring other loan options, our team is here to help you make informed decisions. We pride ourselves on offering fast, flexible funding, often closing deals within a week, so you can seize opportunities as they arise.

With our expertise and commitment to a seamless lending process, BrightBridge Realty Capital is your trusted partner in real estate investment. Visit our website to learn more about how we can support your real estate journey.