Insights / How Fannie Mae Counts Rental Income (Form 1038/1039 & 75% Rule)
August 3, 2026
How Fannie Mae Counts Rental Income (Form 1038/1039 & 75% Rule)
Fannie Mae lets lenders count only 75% of a rental property's gross rent as qualifying income, treating the other 25% as an automatic vacancy and maintenance factor. Which worksheet applies, Form 1038 for individually owned rentals or Form 1039 for properties held in an LLC or other business entity, depends on how title is held and whether the property already shows up on a filed tax return. If the property has a full year of history, Fannie Mae starts with Schedule E net income and adds back certain expenses; if it doesn't, a lease or an appraiser's Form 1007 rent schedule drives the number instead, and the 75% haircut gets applied to gross rent.
Most of the confusion here isn't about whether rental income counts. It's about which math Fannie Mae wants and which form documents it. The rule set actually branches into two separate paths depending on one question: has this property been on a tax return for a full year, or not?
Get the branch wrong and you'll either underqualify a borrower who has real cash flow to show, or hand an underwriter a worksheet that doesn't match the file. Here's how the two paths actually work.
What is the Fannie Mae 75% rule for rental income?
When a property doesn't yet have Schedule E history, Fannie Mae bases qualifying income on gross rent, either from a signed lease or from an appraiser's market rent opinion, and then applies a flat 75% factor to that gross figure. The remaining 25% stands in for vacancy losses and ordinary maintenance costs, and lenders don't get to argue it away with a lower actual expense ratio. If the property is the one being financed (a purchase or a primary-to-rental conversion), the lender then subtracts the full monthly housing payment, PITIA, from that 75% figure to arrive at net qualifying rental income, which can be a negative number that gets added back into the debt-to-income ratio rather than counted as income.
This 75% factor shows up whether the lease number comes from an existing tenant or from the appraiser's opinion of market rent. There's no version of this rule where 100% of a lease amount counts. That trips up a lot of first-time landlords who assume their $X lease payment is dollar-for-dollar income; it isn't, under Fannie Mae guidelines.
When do I use Form 1038 vs Form 1039?
Form 1038 is the individual rental income worksheet, used when the borrower personally holds title to the rental (up to several properties on one form). Form 1039 covers rental income from properties owned through a business entity, such as an LLC or partnership, where the borrower's ownership share and the entity's tax filings both factor into the calculation.
The choice isn't a lender preference, it's dictated by how title sits. A borrower who bought a rental in their own name uses Form 1038 math even if they manage it like a business. A borrower whose rentals sit inside an LLC needs Form 1039, which pulls from the entity's tax return rather than the individual's Schedule E. This is one more reason how you hold title matters before you ever get to the income calculation, because it decides which worksheet an underwriter reaches for.
Form 1007 (Single-Family Comparable Rent Schedule) is different from both. It's an appraiser-completed form that estimates market rent for the subject property, and it feeds into Form 1038 or 1039 when there's no lease yet, or when the lease amount needs a market-rent backstop.
How does Schedule E rental income get calculated?
Once a property has appeared on Schedule E for a full tax year, Fannie Mae wants actual tax-return income rather than a lease estimate. The math starts with the net rental income (or loss) reported on Schedule E, then adds back the non-cash and financing items that Schedule E deducts but that don't represent real cash outflow for qualifying purposes: depreciation, mortgage interest, taxes, insurance, and any one-time or non-recurring expenses. That adjusted total gets divided by the number of months the property was actually in service during the tax year, not always 12, since a mid-year purchase or a period of vacancy shortens that denominator.
This method tends to produce a higher qualifying number than the 75%-of-lease method when a property runs efficiently, because it's based on what actually happened rather than a flat haircut. It can also produce a lower number, or even a negative one, if the property genuinely lost money on paper that year.
What if the property has no rental history yet?
Three common situations force the lease-based, 75%-of-gross path instead of Schedule E:
A newly purchased investment property has no prior tax return at all, so the lender relies on the executed lease or, if unleased, the Form 1007 market rent estimate. A primary residence being converted to a rental (the borrower is moving and keeping the old house) also has no rental history on Schedule E yet. And a property that was rented for only part of the prior year, where the borrower didn't file a full year of Schedule E, may not have a clean number either, depending on the file.
In all three cases, the underwriter is documenting income that hasn't happened on paper yet, so Fannie Mae trims the borrower's optimism with the flat 75% factor rather than trusting a projected 100% collection rate.
Schedule E vs. lease-based math, side by side
| Schedule E method | Lease/appraisal-based method (75% rule) | |
|---|---|---|
| When it applies | Property on Schedule E for a full tax year | New purchase, primary-to-rental conversion, or no full year of history |
| Source document | Filed tax return (Schedule E) | Signed lease and/or Form 1007 appraiser rent schedule |
| Worksheet used | Form 1038 (individual) or Form 1039 (entity) | Same forms, different input section |
| Core calculation | Net rental income + depreciation, mortgage interest, taxes, insurance, non-recurring items, divided by months in service | Gross monthly rent x 75%, minus PITIA if subject property |
| Typical result | Reflects actual operating performance | Flat, conservative vacancy/maintenance assumption |
A real scenario
A borrower came in buying a duplex as an investment purchase. No Schedule E existed yet because the borrower had never owned rental property before, and the seller's existing tenant was on a month-to-month lease with no signed renewal on file. The wrinkle: the underwriter needed a rent figure that wasn't a stale lease and wasn't a guess, so the file went through a Form 1007 comparable rent schedule completed by the appraiser at the time of the appraisal.
The outcome used the appraiser's market rent opinion as the gross rent figure, applied Fannie Mae's 75% factor to get qualifying gross rental income, then subtracted the full PITIA for that unit since it was part of the subject property. That net figure fed into the debt-to-income ratio on Form 1038 since the borrower held title individually, not through an entity. Once that duplex shows up on next year's Schedule E, any refinance or new purchase will likely pull from the tax-return method instead, and the number could move in either direction depending on how the property actually performs.
Borrowers building out a rental portfolio, or evaluating a property purely on cash flow rather than personal income, should also look at the investment property financing options built around rent coverage rather than a borrower's personal debt-to-income ratio; a DSCR calculator gives a quick sense of whether a property's rent alone would cover the proposed payment, separate from the Fannie Mae worksheet math described here. Properties that don't fit conventional documentation at all, including some short-term-rental or entity-owned situations, often end up better suited to non-QM programs that size the loan around rent rather than a W-2 or Schedule E history.
Frequently asked questions
What is the 75% rule for rental income?
Fannie Mae counts only 75% of a rental property's gross monthly rent as qualifying income, whether that rent figure comes from a signed lease or an appraiser's Form 1007 market rent opinion. The other 25% is treated as an automatic allowance for vacancy and maintenance, and it applies before any expenses are subtracted.
Do I need a lease to use rental income to qualify?
Not always. A signed lease is the most direct source, but if a unit is vacant or the borrower hasn't leased it yet, an appraiser's Form 1007 comparable rent schedule can establish market rent instead, and the same 75% factor still applies.
What's the difference between Form 1038 and Form 1039?
Form 1038 documents rental income for properties the borrower owns individually, while Form 1039 documents rental income for properties held through a business entity like an LLC, pulling from the entity's tax return rather than the individual's Schedule E.
Can I use Schedule E income if I just bought the property?
No. Schedule E-based income requires the property to have appeared on a filed tax return for a full year of operation. A property purchased this year uses lease or appraisal-based income (the 75% rule) instead, since there's no tax-return history to pull from yet.
Does Fannie Mae use gross rent or net rent to qualify a borrower?
It depends on the method. The lease/appraisal path starts with gross rent and applies the 75% factor, then subtracts the property's full housing payment if it's the subject property. The Schedule E path starts from net rental income already reported on the tax return and adds back specific non-cash and financing expenses.
What is Form 1007 used for?
Form 1007 is the Single-Family Comparable Rent Schedule, completed by the appraiser to estimate a property's market rent using comparable rental listings, and it's used when there's no reliable lease amount to rely on.
How many months of Schedule E history do I need before it counts?
Fannie Mae generally wants a full tax year of Schedule E reporting on the property before switching from the lease-based method to the tax-return-based method. A partial year of rental activity typically keeps the file on the lease/appraisal path.
Does the 75% rule apply to DSCR or non-QM investment loans too?
Not in the same form. DSCR programs are lender-specific and typically size the loan around a debt service coverage ratio using the property's rent directly, rather than routing through Fannie Mae's Form 1038/1039 worksheets, though many DSCR guidelines still build in their own vacancy assumptions.
Reviewed by Jesse Gonzalez, NMLS #278103
This article is for general information only and is not a loan approval, rate quote, or financial advice. Program guidelines change and every file is different, so talk to a licensed loan officer about your scenario. True Blue Lending Corporation, NMLS #2380218. Equal Housing Opportunity.