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How to calculate future rental income from a departing residence
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With careful planning, you can use the future rental income you'll collect from your departing residence to get approved for a mortgage to buy a new home.
I'll explain how in this article, including a step-by-step.
What is a departing residence?
A departing residence is a home you previously lived in but are leaving to move into a new one. This property was your primary residence.
Some homeowners sell their current home before buying another. Selling helps free up equity for the down payment on the new property. Others keep their current home and rent it out to earn additional income.
Recently, more buyers have been holding onto their departing residence as an investment property. They aim to take advantage of high rental income and low mortgage payments. Many also expect the property to grow in value over time.
Matt plans to buy a new home. He decided to keep his current home as a rental property instead of selling it.
His current mortgage has a low interest rate and affordable monthly payments. This makes it easier for him to take on a new mortgage. The home is in a desirable rental area, and Matt expects to charge enough rent to cover his current housing costs.
Matt also believes the property’s value will rise, making it a smart long-term investment.
What is future rental income?
You expect to earn future rental income by renting out a property instead of living in it.
If you plan to rent your departing residence, this income represents the rent you expect to collect from tenants based on the lease terms.
Lenders often allow future rental income to help you qualify for another mortgage. However, you cannot count 100% of this income when applying for a loan.
- How future rental income can help you buy an investment property
- How can future rental income help me buy a 2-to-4-unit property?
How do lenders calculate future rental income from a departing residence?
Lenders allow a portion of future rental income from your departing residence to help offset housing costs when you apply for another mortgage. Here’s how the process works:
Step 1: Determine rental income
Lenders start by reviewing your lease agreement or ordering a Comparable Rent Schedule to establish the rental income amount:
- Lease Agreement: Provide a complete copy of the signed lease agreement, showing rent and terms.
- Comparable Rent Schedule: Lenders may also request a market rent analysis from a licensed appraiser. They will use the lower value between the lease agreement and the Comparable Rent Schedule.
Step 2: Calculate net rental income
Lenders typically use 75% of the rental income, subtracting 25% for maintenance and vacancies.
Example Calculation:
- Monthly rent: $3,000
- Subtract 25%: -$750
- Net rental income: $2,250
Step 3: Offset housing costs
Lenders subtract the net rental income from the housing expense of the departing residence to reduce its impact on your debt-to-income (DTI) ratio.
Example Calculation:
- Monthly housing expense (PITI): $2,250
- Net rental income: +$2,250
- Adjusted housing expense: $0
Since the net rental income offsets the full housing expense, the departing residence no longer affects the DTI calculation. Using future rental income to offset costs, you can improve your DTI ratio and increase your chances of qualifying for a mortgage on a new home.
Some lenders may calculate future rental income differently or require you to have experience managing rental properties. Speak with a mortgage professional to understand how much rental income you can use based on your situation.
Can I count rent from my departing residence as income?
You may be able to add a portion of future rental income from your departing residence to your qualifying income. This can increase your eligibility for a larger mortgage and help you afford a more expensive home.
To include rental income from a departing residence, you must meet two conditions:
- Net rental income must exceed housing expenses (PITI).
- You must have at least one year of property management experience.
The excess can be added to your qualifying income if your net rental income exceeds your housing expense. However, you must prove your property management experience. This means showing a history of owning a rental property and receiving rental income. Lenders typically require a copy of your federal tax return to verify this experience.
- Matt’s monthly housing expense (PITI): $2,000
- Rental income: $3,000
- Subtract 25% for maintenance/vacancies: -$750
- Net rental income: $2,250
Net rental income minus housing expense:
- $2,250 - $2,000 = $250
Matt has a $250 positive cash flow. If he can prove property management experience, he can add this $250 to his qualifying income.
This additional income may help Matt qualify for a larger loan for his new home.
How will future rental income help me afford a new home?
Finding a renter for your current home helps offset the mortgage debt. By converting your existing home to a rental property, you can use the future rental income to offset the cost of your current mortgage and then qualify for another mortgage.
Matt wants to rent out his current home and buy a new one.
His monthly payment on his current home is $2,250, and the new house will cost $3,500 a month. He also has other monthly debts of $500. Altogether, his monthly expenses add up to $6,250.
Matt earns $9,000 a month before taxes, but his total debts leave him with a debt-to-income (DTI) ratio of 69%. That’s too high to qualify for the new mortgage since lenders usually look for a lower DTI.
Here's a breakdown:
- Monthly expenses: $6,250
- Monthly income: $9,000
- DTI ratio: 69%
However, based on the local rental market, Matt could rent out his current home for $3,000 a month. After setting aside 25% for maintenance and vacancies, he’d have $2,250 in net rental income. This amount can fully offset the housing payment on his current home.
Matt lowers his debt by using the future rental income to reduce his debt-to-income (DTI) ratio to 44%. With this improved DTI, he qualifies for the mortgage on his new home.
Here’s the updated breakdown:
- Monthly expenses: $4,000
- Monthly income: $9,000
- DTI ratio: 44%
Whether you're ready to put in an offer on a new place or just weighing your options for the future, we've helped hundreds of borrowers buy new homes after converting their current homes to investment properties. Schedule some time to talk today.
When should I find a renter for my current home?
The best time to find a renter is during the mortgage contingency period.
At this stage, you’ve committed to buying your new home, your mortgage is being processed, and the contingency clause offers protection if you can’t secure a tenant in time. If finding a renter doesn’t work out, you can back out of the deal and have your earnest money refunded.
While the typical 30-day contingency period may feel tight, real estate and rental markets often move quickly. During this time, you can:
- Advertise your property.
- Show it to potential renters.
- Finalize a lease agreement.
If you can’t qualify for both mortgages outright, your lender will require proof that you’ve rented out your current home before the contingency period ends.
Documents your lender needs:
- Signed Lease Agreement: Shows the rental terms and amount.
- Security Deposit Check: Confirms you have a renter and verifies the agreed rent.
How to use future rental income to qualify for an additional mortgage
At NewCastle Home Loans, we simplify the pre-approval process and can help you turn your current home into a rental property.
Getting approved for a new mortgage while preparing to rent out your current home is time-sensitive. Meeting deadlines can depend on the lender you choose. Our 100% online process speeds up the loan process, helping you get approved faster. Here are four simple steps to secure an additional mortgage:
1. Get pre-approved.
Obtain a verified pre-approval letter the same day. This shows you are ready to make an offer with confidence. A decision-maker verifies your information, ensuring you can act quickly when you find the right home. Including a pre-approval letter from NewCastle Home Loans in your offer can speed up the process and strengthen your position with the seller.
2. Make an offer to buy.
Work with your real estate agent to make an offer on the home. Attach your pre-approval letter to show you are a serious buyer. This step can help you stand out in competitive situations. Ensure your offer allows enough time to find a renter and sign a lease before the mortgage contingency date.
3. Find a renter and execute a lease.
Research rental rates, advertise your property, and secure a tenant. Provide your lender with a signed lease and proof of a security deposit as part of the qualification process for your new loan. Make sure to complete this before the mortgage contingency period ends.
4. Receive final loan approval from your lender.
We will issue your mortgage commitment once we receive proof of the lease and security deposit. After this, you are ready to close on your new home.
At NewCastle Home Loans, we simplify the mortgage process and provide clear guidance to help you buy a home confidently. We are here to answer your questions and support you every step of the way.
- Fannie Mae: Rental income
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Freddie Mac: Rental income
- Loan Estimate Explainer
- Sales Contract Explainer
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