What This Guide Covers
- The 100-mile employment relocation rule and why it decides everything
- Exactly how FHA calculates the 75% rental offset, with a worked example
- What changes once the departing residence already has rental history on your tax returns
- The 25% equity requirement and the documentation that proves it
- Why moving across town or upgrading to a bigger house doesn't qualify, even with a signed lease
How Underwriters Should Treat Departing Residence Rental Income
FHA loans are for primary residences, so when a borrower is buying a new home while keeping the old one, underwriting has to answer one question first: is the mortgage on the departing residence still counted against the borrower's debt-to-income ratio, or can rental income offset it?
Most of the time, the answer is that it's still counted in full. FHA only allows the departing residence's PITIA (principal, interest, taxes, insurance, and any association dues) to be offset by rental income when the borrower can document that the move is a genuine relocation, not simply an upgrade or a preference to live somewhere else. That documentation requirement is where most loan files fall apart.
There are two paths, and they lead to two completely different calculations. If the departing residence has no rental history, the borrower has to prove the 100-mile employment relocation, and the qualifying income is calculated at 75% of the lesser of the lease amount or appraised market rent. If the borrower already has established rental history on that property reported on Schedule E, FHA generally moves to a historical income analysis instead, using the tax return figures with allowable add-backs rather than the market-rent calculation. Getting these two paths confused is the single most common error loan officers make on this scenario.
Required Documentation
- ✓Fully executed lease agreement with a term of at least one year after closing
- ✓Proof the tenant has paid the security deposit and/or first month's rent
- ✓Appraisal (1007 or comparable rent schedule) establishing market rent on the departing residence
- ✓Appraisal documentation showing at least 25% equity in the departing residence
- ✓Evidence the borrower is relocating more than 100 miles for employment, when relying on this exception
- ✓If rental history already exists: two years of tax returns with Schedule E showing the property
What Most Lenders Get Wrong
- 1.Assuming any signed lease is enough. A lease alone does not unlock the rental offset. Without the 100-mile employment relocation (or established rental history), the departing residence's full PITIA still counts against DTI regardless of what the lease says.
- 2.Not checking the distance before running numbers. Loan officers frequently pre-approve a borrower assuming the rental offset applies, then discover during processing that the new home is 40 miles from the old one for a job change, not 100+, and the whole DTI calculation has to be redone, sometimes killing the deal.
- 3.Using the lease amount instead of the lesser of lease or appraised market rent. If the lease says $2,400 but the appraisal supports $2,300 in market rent, the qualifying calculation uses $2,300, not $2,400. Using the higher number overstates qualifying income and creates a condition the underwriter will kick back.
- 4.Skipping the 25% equity check. Even when the 100-mile relocation is well documented, FHA still requires the appraisal to confirm at least 25% equity in the departing residence before the rental income can be used. This gets missed because it's buried in the equity section of the appraisal, not the rent schedule.
The 100-Mile Rule: Why Most Loan Officers Get This Wrong
The most common scenario, by far, is a borrower who has never rented out the departing residence before and wants to use projected rental income to offset that mortgage payment while qualifying for the new FHA loan. To allow this, FHA requires the borrower to be relocating more than 100 miles from their current residence due to employment.
This is the rule that trips up the most files, because it's easy to assume any relocation counts. It doesn't. If a borrower is simply upgrading to a larger home, moving across town, or relocating less than 100 miles away for any reason, FHA generally does not allow the departing residence's rental income to offset the existing mortgage payment. The full PITIA on the departing residence gets counted as a debt in the new loan's DTI calculation, exactly as if the borrower weren't renting it out at all.
This single rule is why some borrowers who look great on paper, strong income, solid credit, a signed lease already in hand, still don't qualify for the new purchase. If the job change is 60 miles away instead of 100+, the departing mortgage payment doesn't disappear from DTI just because there's a tenant moving in.
How the 75% Rental Offset Is Calculated
Once the 100-mile relocation is documented, FHA doesn't count 100% of the lease amount as offsetting income. The calculation uses the lesser of the market rent from the appraisal or the actual lease amount, then applies a 75% factor to account for vacancy and ongoing maintenance costs.
Here's a worked example: the lease is for $2,400 per month, but the appraisal (typically a 1007 or comparable rent schedule) supports market rent of $2,300. The lender uses the lower figure, $2,300, and multiplies it by 75%, arriving at $1,725 in qualifying rental income. That $1,725 offsets the departing residence's PITIA in the DTI calculation for the new FHA loan, not the full $2,400 the tenant is actually paying.
This matters for planning purposes. If a borrower assumes their full lease amount will offset the old mortgage, they may be overestimating how much room they have to qualify for the new purchase. Running the actual numbers, lesser-of comparison and 75% factor included, before making an offer on the new home avoids an unpleasant surprise at underwriting.
If You Already Have Rental History on the Departing Residence
The calculation changes entirely if the borrower already rented out the property before applying, and that rental income is reported on Schedule E of their tax returns. In that case, FHA generally moves away from the appraisal-based 75% market-rent calculation and instead uses a historical rental income analysis.
The lender analyzes the Schedule E figures and adds back allowable expenses, depreciation being the most common, per HUD guidelines, to arrive at the qualifying rental income. This tends to produce a different number than the 75%-of-market-rent method, sometimes higher and sometimes lower depending on how the property actually performed and how it was reported.
The practical takeaway: if you've been renting the departing residence for at least a full tax year already, the 100-mile relocation requirement isn't the test that applies to your file, established rental history is. Bring the last two years of tax returns with Schedule E to the first conversation so this can be scoped correctly from the start, rather than discovered midway through processing.
The 25% Equity Requirement and Why the Appraisal Does Double Duty
Beyond the relocation distance and the lease, FHA requires the borrower to have at least 25% equity in the departing residence before its rental income can be used to offset the mortgage payment. This is documented by the same appraisal that establishes market rent, so the appraisal on the departing residence is doing two jobs at once: setting the rent figure for the 75% calculation and confirming the equity position.
Borrowers who are close to that 25% threshold should order the appraisal early rather than assuming it will land where they expect. Market shifts since the original purchase, or since a refinance, can move the equity position enough to change the outcome. If the appraisal comes back showing 22% equity instead of an assumed 25%+, the rental offset isn't available regardless of how well-documented the relocation and lease are, and the full PITIA goes back into DTI.
For Bakersfield borrowers relocating out of the area for oil and gas, agriculture, healthcare, or logistics roles, this sequencing matters. Order the appraisal on the departing residence as soon as the employment relocation is confirmed, not after an offer is already in on the new home, so there's time to react if either the rent figure or the equity number comes back lower than expected.
This is one of the most misunderstood rules in FHA lending, and I mean that literally, I've had experienced loan officers at other shops tell borrowers the rental income counts because there's a lease, full stop. There isn't a lease exception. The 100-mile employment relocation and the 25% equity requirement are the gate, and skipping either one means the departing mortgage payment stays in the DTI calculation whether there's a tenant in the house or not. If you're relocating for work and thinking about keeping your current home as a rental, call me before you sign a lease or make an offer on the new place. I'll run the actual numbers, lesser-of rent comparison, 75% factor, and equity position, so you know exactly what qualifies before you're committed to either transaction.
Relocating for work and thinking about renting out your current home to buy your next one on FHA?
Call Dan at (661) 342-9381. He will review your specific situation and documentation in a free call.