Turning Your Current Home Into a Rental When You Buy the Next One
You do not have to sell your Sacramento home to buy your next one. If you keep it and rent it out, lenders call it a departing residence, and there are established rules for counting that rent as income so you can qualify for the new mortgage. Conventional financing generally requires a signed lease and counts 75% of the gross rent. FHA is stricter — it typically requires you to be relocating more than 100 miles away and to hold at least 25% equity in the home you are leaving. Get those requirements lined up before you go under contract, not after.
Why This Strategy Is Suddenly Everywhere
A lot of Sacramento-area homeowners are sitting on a mortgage in the twos or low threes. Selling means handing that rate back to the bank and never getting it again.
Keeping it means something different: an appreciating asset in a supply-constrained region, with a tenant covering a payment that gets easier to carry every year as rents rise and the payment stays fixed. That is not a trick. It is just what happens when you own a fixed-rate asset for a long time in an inflationary economy.
The obstacle is never desire. It is qualifying. Two mortgage payments on one income is a heavy debt-to-income load — unless the rent counts.
The Core Rule: Lenders Count 75% of the Rent
Whatever the lease says, underwriting generally uses 75% of the gross monthly rent. The missing 25% is assumed to be absorbed by vacancy and maintenance.
A $2,600 lease becomes $1,950 of qualifying rental income. From there, the treatment depends on your loan type — and this is where files fall apart.
Conventional (Fannie Mae / Freddie Mac)
FHA
Distance requirement
None
You must generally be relocating more than 100 miles from the departing residence
Equity requirement
No minimum equity requirement for the departing residence
Generally at least 25% equity where there is no rental history since the last tax filing
Documentation
Signed lease required, plus proof of the security deposit and first month’s rent for a new lease, or two months of bank statements showing rent received on an existing lease
Signed lease of at least one year plus evidence of the deposit; an appraisal evidencing market rent where there is no rental history
How the income is applied
75% of gross rent counted as qualifying income; the full payment on the departing property is treated as a debt
Net rental income can generally only offset the departing property’s housing expense — it does not become surplus income
Reserves
Cash reserves for both properties are commonly required
Lender and file dependent
That FHA distance rule catches people constantly. A homeowner moving from Elk Grove to Folsom is not relocating 100 miles. If FHA is your loan on the new purchase, and you cannot document a qualifying relocation, you will likely need to carry both payments on your own income — or use conventional financing instead.
The Sequence That Actually Works
1. Talk to a lender before you list or shop. The whole strategy hinges on whether the rent counts. Find out first.
2. Get a realistic market rent figure. Not a Zillow estimate and not what your neighbor claims. A lender may order Form 1007 or 1025 to establish market rent, and that number matters.
3. Sign the lease before or during your escrow. When you are converting a primary residence to a rental, a signed lease is generally required — a market rent form alone is usually not enough.
4. Collect the deposit and first month’s rent, and document it. Copies of the checks with proof of deposit. This is the single most commonly missing item in the file.
5. Build reserves. Expect to show cash reserves covering both properties. If a tenant leaves or a water heater dies, the lender wants to know you are not underwater in month two.
6. Line up landlord insurance. A homeowners policy on an owner-occupied home is not the same product as a landlord policy. Notify your carrier before the tenant moves in.
guideline references
The 75% vacancy factor and lease documentation requirements reference the Fannie Mae Selling Guide, section B3-3.1-08 (Rental Income). Confirm current language before publishing.
FHA departing residence rules — including the 100-mile relocation requirement and the 25% equity standard — reference HUD Handbook 4000.1. Confirm before publishing.
Reserve requirements vary by lender overlay and by automated underwriting findings. Present as typical, not universal.
Note separately: for a 2-to-4 unit property being purchased as a primary residence, conventional guidelines restrict the use of projected rental income from the subject property. Verify current treatment before referencing.
The Numbers on a Real Sacramento Scenario
A homeowner in Citrus Heights bought in 2021. Balance of $340,000 at 2.875%. Total housing payment with taxes and insurance runs about $2,050. Market rent on the street is $2,500.
Line
Amount
Effect on Qualifying
Gross market rent
$2,500 per month
Starting point
Lender haircut (25%)
− $625
Vacancy and maintenance assumption
Qualifying rental income
$1,875 per month
Counted as income on a conventional file
Departing property payment
− $2,050 per month
Counted as a debt
Net effect on DTI
Approximately −$175 per month
A manageable drag instead of a $2,050 anchor
Without countable rent, that homeowner is carrying $2,050 in extra debt and probably cannot buy anything meaningful. With it, they are carrying $175 — and they keep a sub-3% asset that a tenant is paying down for them.
Also worth noticing: the property is cash-flow positive in real life ($2,500 in, $2,050 out) even though it shows as slightly negative in underwriting. The lender’s haircut is conservative by design. Your actual bank account does better than your loan application suggests.
The Trade-Offs Nobody Mentions
You are becoming a landlord
Tenant screening, California habitability requirements, security deposit rules, notice requirements, and the reality of a 10 p.m. plumbing call. Property management typically runs 8% to 10% of gross rent and is worth budgeting for even if you plan to self-manage at first.
The capital gains clock is running
This is the big one, and it is routinely ignored. The federal home-sale exclusion generally requires you to have lived in the home as your primary residence for at least two of the previous five years. Rent it out long enough and that window closes. Depreciation taken during the rental period also comes back at sale through recapture.
That is a conversation for your CPA, not your loan officer, and it should happen before you sign a lease — not five years later. For some homeowners the tax cost of holding outweighs the benefit of keeping the low rate. For most it does not. The only way to know is to run it.
Your insurance and your loan terms change
Notify your insurer. And if your current loan has an owner-occupancy requirement that you agreed to at closing, make sure enough time has passed that converting to a rental is not a problem.
Frequently Asked Questions
Can I use rent from my current home to qualify for a new mortgage?
Usually yes. Conventional financing generally allows 75% of the gross rent to count as qualifying income with a signed lease and proof of the deposit and first month’s rent. FHA is stricter and typically requires a relocation of more than 100 miles plus at least 25% equity in the departing home.
Do I need a signed lease before closing on the new home?
For a primary residence being converted to a rental, a signed lease is generally required — a market rent estimate alone is usually not sufficient. Line up your tenant during escrow rather than after.
Why do lenders only count 75% of the rent?
The remaining 25% is a built-in allowance for vacancy and ongoing maintenance. It is a conservative assumption applied across the board, not a judgment about your specific property.
How much equity do I need in my current home to rent it out?
On conventional financing, there is generally no minimum equity requirement for the departing residence. FHA typically requires at least 25% equity where you do not have a rental history for the property on your last tax return.
Will I need cash reserves?
Usually. Lenders commonly require reserves covering payments on both properties so that a vacancy or repair does not immediately put you at risk. The exact requirement depends on your loan type and automated underwriting findings.
Does keeping my home as a rental affect my taxes?
Yes, in ways that deserve real attention. Converting a primary residence to a rental starts a clock on the federal home-sale capital gains exclusion, and depreciation claimed during the rental period is recaptured when you sell. Talk to a CPA before you sign a lease. This is a tax question, not a mortgage question.
Thinking About Keeping Your Current Home?
Before you list it, find out whether the rent counts. That single answer usually decides whether you sell or hold — and it takes one conversation to get.
Bring your current balance, your rate, and a rough sense of market rent on your street, and the math comes together quickly.
Call or text (916) 794-0777 | thechriskennedyteam.com
The Chris Kennedy Team | Reliant Lending | NMLS #971546. Serving Sacramento, Placer, El Dorado, and Yolo counties. This article is for general educational purposes only and is not a commitment to lend, an offer of credit, or financial, tax, or legal advice. Program terms, guidelines, and rates are subject to change without notice. Equal Housing Opportunity.