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Author: Mark Ainely | Partner GC Realty & Development & Co-Host Straight Up Chicago Investor Podcast
If you own a home with a Fannie Mae backed loan and you're planning to move out, keep the house, rent it to a tenant, and buy a new primary residence, there's a documentation rule you need to know about before you go under contract on your next home. Not sure which kind of loan you have? You can check using Fannie Mae's free Loan Lookup tool. If your current mortgage is an FHA loan, that is not the same as a Fannie Mae loan, and FHA follows its own separate set of departing residence guidelines, so confirm which rules actually apply to you before reading further. It's called the departing residence rule, and it decides whether the rent you'll collect on your old home actually helps you qualify for your new mortgage.
We manage roughly 1,500 units across the Chicago suburbs, and this exact scenario comes across our desk constantly. Someone is upgrading, downsizing, relocating for a job, or simply ready to become a landlord for the first time. They assume a signed lease with a new tenant is enough to show the lender. In this specific scenario, it isn't. Here's what the rule actually says, why it exists, and what to have ready before you go shopping for your next house.
Key Takeaways
If your current home is a "departing residence" (you're moving out and renting it while buying a new primary residence), Fannie Mae does not allow a lease agreement alone to establish the qualifying rental income.
Instead, the rent must be verified through an appraiser using Form 1007 (Single-Family Comparable Rent Schedule) for a one-unit property, or Form 1025 for a 2 to 4 unit property.
You typically need at least 30% equity in the departing residence, verified by an appraisal, before any rental income offset is allowed at all.
Rental income from a departing residence can only offset that property's own mortgage payment (PITIA). It does not add extra income to help you qualify for a larger loan, unless you already have 12 months of documented property management experience.
Lenders will also want to see reserves covering both housing payments in case the rental sits vacant.
Why Lenders Treat a Departing Residence Differently
Every other rental scenario in the Fannie Mae guide accepts a signed lease as proof of the rent. Buying a straightforward investment property with a tenant already in place? Lease works. Inheriting a tenant on a purchase? Lease works. But when the "rental property" used to be your own home and you haven't actually lived the landlord life yet, Fannie Mae doesn't trust the lease alone. There's no track record. The lease could be with a friend, a family member, or simply optimistic about what the market will actually pay.
So the guide is specific about this. The lender is not permitted to use a lease agreement to determine qualifying rental income when the investment property is a departing residence. That rule also applies if you're buying a new investment property within 45 days of the subject property, a separate but related scenario.
Instead, the rent estimate has to come from a neutral third party: a licensed appraiser filling out Form 1007. The appraiser pulls three comparable rentals in your neighborhood, adjusts for differences in size, condition, and amenities, and lands on a defensible market rent number. That number, not whatever your lease says, is what the lender uses.
What This Means for Your Timeline
This appraisal isn't optional paperwork you can skip if you already have a signed lease in hand. If you want the rental income to count at all toward your new purchase, you need to budget for and schedule this appraisal as part of your loan process. That's an added cost and an added step, on top of the appraisal being done on the new home you're buying.
A few other things worth locking in before you talk to your lender:
Equity matters first. Most lenders want to see at least 30% equity in the departing residence before they'll consider any rental income offset at all. If you're not there yet, the rental income conversation may be moot no matter how strong your local rental market is.
Reserves get scrutinized. Because a rental sitting vacant for even one month can blow up someone's debt to income ratio, lenders typically want extra cash reserves on hand covering both the old mortgage and the new one.
The offset has a ceiling. Even with a clean 1007 in hand, the math only works to cancel out your old home's own PITIA. It generally will not push extra income onto your application to help you qualify for a bigger loan on the new place, unless you can already show 12 months of documented property management experience through a prior Schedule E, business tax return, or an existing lease dated far enough back. First time landlord converting their first home? Assume the rental income offsets the old payment and nothing more.
What to Do Before You List Your Old Home as a Rental
Talk to your lender before you talk to a tenant. Confirm upfront whether they're going to require Form 1007 and get it scheduled early. This is not a step to discover halfway through underwriting.
Get a read on your equity position. A quick comparative market analysis will tell you if you're anywhere close to that 30% threshold before you spend money on anything else.
Price the rent conservatively and confirm it against market data, not just what a listing site tells you it should rent for. The appraiser's comps will either support your number or they won't, and you want to know which before you're under contract on the new house.
Build your reserve cushion now. If you're going to need six or more months of combined housing payments sitting in the bank, start setting that aside well before you apply.
Line up a property manager or a plan for self-managing, and be honest with yourself about which one you're actually equipped to do. A vacancy or a bad tenant placement in month one undermines the entire plan.
FAQ
Can I just use my signed lease instead of paying for an appraisal? No. For a departing residence, Fannie Mae specifically excludes lease agreements as acceptable standalone documentation. You need Form 1007 (or Form 1025 for 2 to 4 unit properties) regardless of whether you already have a tenant signed.
Does this apply to Freddie Mac loans too? Freddie Mac has its own rental income chapter with similar guardrails, though the specifics can differ. If your loan is a Freddie Mac loan rather than Fannie Mae, confirm the exact documentation path with your lender.
What if my tenant already moved in and is paying rent? Even with rent checks in hand, the departing residence restriction on lease agreements still applies. Bank statements showing rent deposits are useful supporting evidence in some other rental income scenarios, but they don't substitute for the required appraisal here.
How much does a Form 1007 cost? It varies by market and appraiser, but plan on it being billed similarly to a standard appraisal fee, sometimes bundled with the appraisal on the new home if the same appraiser or company handles both.
What if the appraiser's rent estimate comes in lower than my lease? The lender uses the lower, more conservative number for qualifying purposes. This is exactly why pricing your rental realistically from the start protects your approval.
Don't Go At This Alone!
Converting your home into a rental while buying your next one is one of the more complicated moves in real estate, and the mortgage side is only half of it. Once that tenant is in place, you're running a second household with a second set of maintenance calls, lease compliance questions, and vacancy risk, on top of everything involved in your own move.
At GC Realty & Development, we manage close to 1,500 units across the Chicago suburbs for investors doing exactly this: turning a former primary residence into a stable, professionally run rental. My partner Cliff McCue and I have been doing this since 2003, and we know the appraisal, the tenant placement, and the ongoing management side of this transition inside and out. Whether you need a market rent opinion before you talk to your lender, or full-service management once your tenant moves in, we're here to make sure this transition actually works in your favor.
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