FHA Rental Income With No Lease History: The 75 Percent PITI Calculation Explained

If you're researching how FHA treats rental income on a property with no rental history yet, you've probably already run into conflicting advice. Here's the exact rule, and the case that shows why getting it wrong is costly.

The Verbatim HUD 4000.1 Language

"Rental Income from other real estate holdings may be considered Effective Income. For properties without rental history, the Mortgagee must deduct PITI from 75 percent of the lesser of fair market rent reported by the Appraiser or the rent reflected in the lease. Positive net Rental Income must be added to the Borrower's Effective Income. Negative net Rental Income must be included as a debt/liability. If the Borrower is vacating a property, the Borrower must be relocating to an area more than 100 miles from the current Principal Residence."

Read that closely and three things stand out. First, this applies specifically to properties without rental history, meaning you just leased it and there's no track record of collected rent yet. Second, the lender doesn't use the lease amount outright, they use 75 percent of whichever is lower: the lease amount or the appraiser's fair market rent figure. Third, the full PITI, not just principal and interest, gets subtracted from that 75 percent figure before anyone decides whether the number helps or hurts the borrower.

Positive Versus Negative Net Rental Income

If the result after subtracting PITI is positive, it gets added directly to the borrower's effective income, strengthening the file. If it's negative, meaning the 75 percent figure doesn't cover the full PITI, that shortfall gets counted as a debt/liability against the borrower. That single calculation can swing a debt-to-income ratio in either direction, which is exactly why it has to be done with the correct documentation, not assumed.

Why Borrowers Get Blindsided

A situation that comes up often involves a buyer who already owns a second property, a cottage or rental home, and recently leased it to a new tenant. There's no rental history on that specific property, so the lease is brand new. It's an easy mistake to assume the lease payment simply counts dollar-for-dollar as income. One illustrative case: a buyer near Edisto Beach, SC was eleven days from closing on her next purchase when it surfaced that this exact calculation had never been run on her leased cottage. Once the appraiser's fair market rent was compared against the lease and the full PITI was subtracted, the net came out positive, and it was added to her effective income, keeping her file moving.

Documents You Need Side by Side

Two documents substantiate this calculation: the appraiser's rent schedule, FHA Form 1007, and the borrower's signed lease agreement. The lender compares the two figures, takes the lower one, applies the 75 percent factor, and subtracts PITI. Without both documents in the file, the calculation can't be verified.

One Question to Ask Your Loan Officer

If you own a rental property you recently leased and you're applying for a new FHA loan, ask: did you deduct the full PITI from 75 percent of the lesser of the appraiser's fair market rent or my lease amount, and if that number was negative, did you add it to my debts? Then request the Form 1007 next to your signed lease so you can see the math yourself.

Also note the separate requirement if you're vacating a current principal residence to make this rental your prior home: that only works if you're relocating more than 100 miles away. That's a separate test from the rental income math, and it's worth confirming both apply correctly to your situation.

Getting ahead of this calculation before your closing date, not after, is the difference between a smooth file and a scramble.