75 Percent: The FHA Rental Income Rule That Decides Your Multi-Unit Purchase
75 Percent Is the Number That Almost Changed Everything
75 percent. That's the number that decided whether Aliza, a first-time buyer, could qualify for her FHA duplex near Surfside Beach, SC. Her plan was straightforward: live in one unit, rent out the other, and let that rental income help her qualify for the mortgage. There was just one problem. The property had no rental history. No past leases, no tax returns showing income collected. Her first assumption was that the rent simply wouldn't count toward her loan at all.
A Situation That Comes Up Often
This is a situation that comes up often for first-time buyers eyeing a duplex, triplex, or fourplex. They find a property, run the numbers assuming the full market rent will count, and go under contract before checking with a lender. Then they learn FHA doesn't simply add the rent check to their income. There's a specific calculation, and it matters a lot more when the property has no rental history yet.
What the Guideline Actually Says
HUD's FHA guidance addresses this directly: "Rental Income from the subject Property may be considered Effective Income when the Property is a two- to four-unit dwelling or an acceptable Investment Property. For properties without rental history, the Mortgagee must use 75 percent of the lesser of: fair market rent reported by the Appraiser; or the rent reflected in the lease or other rental agreement." That net rental figure then gets added to the borrower's gross income to calculate effective income.
In plain terms, FHA doesn't count the rent you hope to collect. It counts 75 percent of whichever is lower: the fair market rent the appraiser documents, or the rent stated in an actual lease. For a property with no rental history, like Aliza's duplex, the appraiser's fair market rent figure becomes the key number.
How This Played Out for Aliza
For Aliza, the appraiser reported a fair market rent for the second unit. We took 75 percent of that figure and added it to her gross income for qualifying purposes. That reduced number, not the full rent, was what mattered to underwriting. Fortunately, it was enough to help her qualify. Had she assumed the full rent would count and sized her offer around that, she could have found herself short at the underwriting stage, after she was already under contract.
The One Question to Ask Before You Offer
If you're a first-time buyer considering an FHA purchase on a two- to four-unit property with no rental history, there's one question worth asking your lender before you ever write an offer: "What is 75 percent of the lesser of the fair market rent and the lease rent on this property, and does my income still qualify at that number?"
Getting that answer early does two things. It tells you your real qualifying income before you're locked into a contract, and it protects you from the disappointment of finding out mid-underwriting that the numbers don't work the way you assumed.
Know Your Number Before You Offer
Multi-unit FHA purchases can be a smart way into homeownership and rental income at the same time, but the math behind them isn't always what buyers expect. Running the 75 percent calculation before you make an offer puts you in control of the process instead of reacting to it later.
I'm Jason Sharon, a licensed mortgage broker with Home Loans Inc in Charleston, SC. If you're considering an FHA purchase on a duplex, triplex, or fourplex, call 843-LOW-RATE and let's run your numbers together before you write that offer.
Equal Housing Opportunity. Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448.
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