Here is what Fannie says regarding the subject property on properties 5-10. Keep in mind this is only regarding the subject property.
[b]
X, 402.24: Rental Income (11/27/02)
Rental income received for a one-family investment property or a two-family to four-family property is acceptable stable income, even when the borrower occupies one of the units of a multiple-unit property, as long as the likelihood of the continuance of the income can be established. Proposed rent—such as the proposed rent for the borrower’s current residence—is not acceptable unless it is supported by an appraiser’s opinion of market rent for that particular property.
When the security property for the mortgage that is being underwritten will be rented, either the borrower or the appraiser should complete an Operating Income Statement (Form 216)—or a similar form that has the same type of information—to provide the information the lender needs to determine the cash flow and operating income derived from the rental property. Additionally, the lender may rely on either a Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (Form 1025) to obtain the gross income that should be used in determining the income-producing ability of the property. The documentation that is used to support a borrower’s continued receipt of rental income and the calculation of such income depends on whether the rental income is received in connection with the security property for the mortgage being underwritten or in connection with other properties the borrower owns.
• When the rental income relates to the security property and the borrower has no history of receiving rental income from the property, the lender must document the rental income by obtaining an appraiser’s opinion of market rent and, if applicable, copies of the current lease agreement(s). The gross rental income from the property will be equal to the lesser of the market rent established by the appraiser or the current rent based on the existing lease agreement(s). Net rental income will equal 75 percent of the gross rent; the remaining 25 percent of the gross rent is absorbed by vacancy losses and ongoing maintenance expenses. However, when the borrower has a history of receiving rental income for the security property, the lender must document the rental cash flow by obtaining copies of pages from the borrower’s most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040). The lender should then analyze the borrower’s rental cash flow and calculate the net rental income (or loss), making sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower’s cash flow analysis.
• When the rental income relates to rental property other than the security property, the lender may document the rental income by obtaining copies of the pages from the borrower’s most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040) or the current lease agreement(s) (only if a property is not listed on Schedule E because it was acquired subsequent to filing the tax return). If the lender uses current lease agreements, the net rental income will be 75 percent of the gross rent from the lease agreements, with the remaining 25 percent being absorbed by vacancy losses and ongoing maintenance expenses. When the lender uses the signed federal tax returns (including Schedule E) to calculate the net rental income (or loss), it should make sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower’s cash flow analysis. Since Schedule E does not account for the full amount of the mortgage payment for the rental property, the lender should make sure that any portion of the payment (interest, taxes, and insurance) that needs to be added back in the cash flow analysis to avoid a double counting of the expenses was, in fact, added back.
The amount of monthly net rental income (or loss) that is considered as part of the borrower’s total monthly income (or expenses)—and its treatment in the calculation of the borrower’s total debt-to-income ratio—will vary depending on whether the borrower occupies the rental property as his or her principal residence.
• If the net rental income relates to the borrower’s principal residence, the monthly net rental income (as defined above) should be added to the borrower’s total monthly income. Any net rental loss should be added to the borrower’s total monthly obligations. The full amount of the mortgage payment (principal, interest, taxes, and insurance) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.
• If the net rental income relates to a property other than the borrower’s principal residence, the monthly net rental income (as defined above, but excluding the full amount of the related mortgage payment) should be added to the borrower’s total monthly income, while any monthly net rental loss should be added to the borrower’s total monthly obligations. The full amount of the mortgage payment for the rental property (principal, interest, taxes, and insurance) is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. However, the full amount of the mortgage payment for the borrower’s principal residence must be counted as a monthly obligation.[/b]