The Short Answer
Yes, you can use the lease agreement to offset the PITI on your departing residence. Both Fannie Mae (B3-3.1-09) and Freddie Mac (Section 5306.1) allow projected rental income from a fully executed lease to be used for qualifying, even when the borrower has no prior history as a landlord.
Rental income = 75% of gross rent from the lease. Provide the executed lease + proof of security deposit. That's it.
What is a "Departing Residence"?
A departing residence is your current primary residence that you're converting to a rental property when you purchase a new home. This is common when:
- You're relocating for work and keeping your old house
- You want to build a rental portfolio using your existing equity
- The market makes selling unfavorable, so you're holding and renting
The challenge: you now have two housing payments (old mortgage + new mortgage), and lenders need to know you can handle both. That's where rental income comes in.
The 75% Rule
Lenders don't use 100% of the gross rent. They apply a 25% vacancy and expense factor, meaning only 75% of the lease rent counts toward your qualifying income.
| Gross Monthly Rent (per lease) | $2,400 |
| Vacancy/Expense Factor (25%) | -$600 |
| Net Rental Income for Qualifying | $1,800 |
This $1,800 is what gets compared against your PITI to determine if you have positive or negative cash flow.
How to Offset the PITI
The calculation depends on whether your net rental income covers your full housing expense (PITI = Principal + Interest + Taxes + Insurance + HOA + MI if applicable).
Scenario 1: Positive Cash Flow
If net rental income exceeds PITI, the excess can be added to your qualifying income.
| Net Rental Income (75%) | $1,800 |
| PITI on Departing Residence | $1,500 |
| Added to Qualifying Income | +$300/mo |
Scenario 2: Negative Cash Flow
If PITI exceeds net rental income, the shortfall is added as a liability (effectively increasing your DTI).
| Net Rental Income (75%) | $1,800 |
| PITI on Departing Residence | $2,200 |
| Added to Monthly Liabilities | +$400/mo |
Even with negative cash flow, you've offset most of the PITI. Instead of adding the full $2,200 mortgage to your DTI, only $400 hits your ratios.
Documentation Requirements
With no history as a landlord, you need two things:
Fully Executed Lease Agreement
Signed by all parties (landlord and tenant). Must show the property address, monthly rent amount, and lease term. The lease should cover the period when the new mortgage closes.
Evidence of Security Deposit
Bank statement showing the deposit, OR a copy of the tenant's security deposit check. This proves the lease is legitimate and the tenant has committed funds.
Since you have no rental history, there's no Schedule E to provide. The lease + security deposit documentation is sufficient for both Fannie and Freddie when converting a primary to a rental.
Fannie Mae vs. Freddie Mac
Both agencies allow this, but there's one notable difference for borrowers with no landlord history:
| Requirement | Fannie Mae | Freddie Mac |
|---|---|---|
| Vacancy Factor | 25% (use 75%) | 25% (use 75%) |
| Lease Required | Yes, fully executed | Yes, fully executed |
| Security Deposit | Yes, evidence required | Yes, evidence required |
| Equity Requirement | 25% equity if no history* | No specific requirement |
*Fannie Mae B3-3.1-09: If the borrower does not have a history of receiving rental income on their tax returns, and the property is a 1-unit primary being converted, a 25% equity position may be required by DU. This varies by file—strong compensating factors can override.
When DU/LP Might Push Back
The AUS (DU or LP) evaluates risk holistically. Even with proper documentation, the rental income may not be accepted if:
- Low equity in departing residence: Less than 25% equity raises concern about walking away
- Lease terms are unusual: Below-market rent or short-term lease flags potential issues
- Related-party lease: Renting to family members invites scrutiny (arm's-length required)
- High combined DTI: Even with offset, if total DTI exceeds thresholds, the file may need manual underwrite
Pro Tips for Clean Approval
Price the Rent Right
Use market rent (Zillow, Rentometer, or a 1007 form if ordered). Below-market rent raises fraud flags.
Get the Lease Signed Early
Have the executed lease before you're deep into underwriting. Last-minute leases look suspicious.
Deposit First Month + Security
Showing first month's rent plus security deposit on your bank statement demonstrates tenant commitment.
Arm's-Length Tenants
Unrelated tenants simplify everything. Family rentals require additional documentation proving market terms.
Guideline References
For the full text, refer to:
- Fannie Mae: Selling Guide B3-3.1-09 "Rental Income"
selling-guide.fanniemae.com/sel/b3-3.1-09 - Freddie Mac: Seller/Servicer Guide Section 5306.1 "Rental Income"
guide.freddiemac.com/section/5306.1
Key Takeaways
- Yes, the lease works: You can absolutely use a lease agreement to offset PITI with no landlord history
- 75% of gross rent: That's your qualifying number—not 100%
- Two docs needed: Executed lease + security deposit evidence
- Watch the equity: Fannie may require 25% equity if you have no rental history on tax returns
- Market-rate rent: Don't undersell—below-market rent creates problems
Calculate Your DTI
Use our DTI calculator to see how the rental income offset affects your qualifying ratios.
Open DTI Calculator