In almost all cases, you must live at your primary residence for at least one year before renting unless you paid cash for your home.
What Is a Primary Residence?
When applying for a mortgage, you must identify the type of home you are financing. A primary residence, also known as a principal residence, is defined as the place you spend the most time. You can only have one primary home at a time. The IRS uses the “facts and circumstances” test to identify a primary residence which includes:
- The address listed on your:
- Postal service
- Voter registration card
- Federal and state tax returns
- Driver’s license and car registration
- The home is near:
- Your place of work
- One of more family members
- Club or religious organization you are a member of
Lender Rules about Primary Residences
In order to define your house as a primary residence and begin the 12-month clock, you must:
- Occupy your home within 60 days of closing
- Live in your home at least 183 days per year
Following these rules allows you to maintain the benefits of a primary residence and the opportunity to rent out your property after 12 months and in accordance with other lender guidelines.
Exceptions to the 12-Month Occupancy Rule
Life circumstances may change and affect your ability to remain in your newly purchased home for a full year. Here are a few exceptions to the owner-occupancy standards:
- Job relocation – Your job (including military deployment) requires that you move more than 50 miles from your home.
- Co-borrowers – As long as one borrower occupies the home within 60 days, the other(s) do not have to occupy the property immediately.
- Family changes – If the family dynamic changes (birth of a child, divorce) to require a larger home, you may qualify for an exemption.
- No mortgage – If you (or a business partner) paid cash or you’re using seller financing, then there’s no institutional lender to appease.
If you fall under one or more of these exceptions, you may be able to rent your property before the 12-month period is up.
How Long Do I Have to Live in a House With an FHA Loan Before Renting it Out?
FHA residency requirements stipulate that homeowners must live in the home for at least one year before renting it out. You can usually only have one FHA loan at a time.
Additional requirements for qualifying for a second FHA loan include:
- A debt-to-income ratio of less than 43%.
- Down payment of 3.5% (580+ FICO credit score) or 10% (FICO Score of 500-579) of the total purchase price.
- Additional savings for up to two mortgage payments and closing costs.
VA loans also require the home to be owner-occupied for one year unless the homeowner receives orders for military deployment or a new duty station.
Properties with a USDA loan stipulate that only the borrower and their immediate family can live on the property. This loan type does not allow rentals.
Consequences for Not Following Primary Residence Rules
Some borrowers might try to claim the property is their primary residence when they actually do not live there. This is called occupancy fraud.
Committing occupancy fraud may result in fines, penalties, and potential jail time. The bank can also require the loan to be paid in full, which may lead to foreclosure.
Can I Convert My Primary Residence to a Rental Property?
You can convert your primary residence to a rental property after you have lived there for at least one year and follow any rules from your lender and applicable local laws.
Rules for Renting Your Primary Residence
After owning and living in your home for one year, you can rent your primary residence. Here are some rules to consider in the process:
- Lender Requirements
- Local Laws and Zoning
- Fair Housing Laws
- Landlord-Tenant Laws
- Insurance Requirements
- Tax Rules
Lender Requirements
If you are planning to rent your entire home, you may need to refinance and change loan types.
In some cases, lenders add additional restrictions to your loan called overlays. This can prohibit you from renting the home for the life of the loan.
Speak with your lender about their requirements and your options.
Local Laws and Zoning
State and local laws restrict property uses, the number of people living in a home, and more. You need to ensure your plans meet all local and state requirements.
Don’t forget to check HOA policies. Many HOA communities do not allow rental properties or limit the number allowed.
Fair Housing Laws
Landlords must follow federal fair housing laws to avoid discrimination when choosing tenants. You cannot make housing unavailable to a person because of:
- Race
- National origin
- Religion
- Familial status
- Sex
- Disability
Landlord-Tenant Laws
When you rent your property, you become a landlord. Each state has landlord-tenant rights that must be followed.
For example, there are consequences if a landlord fails to return the security deposit within the identified time. In Maryland, landlords face a penalty of 4x the amount due and attorney fees. There is no statute in Tennessee.
Insurance Requirements
Talk with your insurance provider to determine what type of insurance coverage you need. If you are renting a room in your house to one tenant, you may not need additional coverage. But, if you choose to rent your entire property, you will likely need landlord insurance.
Tax Rules
Any income is taxable income. Landlords must report rental income to the IRS, but they can also deduct:
- Mortgage interest
- Property tax
- Operating expenses
- Depreciation
- Maintenance and repairs
Can I Rent Out a Room In My House?
Most homeowners can legally rent out a room in their house, even before a year has passed. However, rules and exceptions apply.
Room rentals still require following rules, including local laws, insurance requirements, and tax rules.
Renting a room may be a good option for those looking to make rental income but cannot rent the entire space. Renting a room in your house also offers companionship, shared household responsibilities, and an opportunity to meet new people.
Can I Airbnb My Primary Residence if I Have a Mortgage?
You can use Airbnb for short-term rentals as long as you have permission from your lender and follow all state and local rules and requirements. This includes owning the property as a primary residence for a year or more unless you are only renting out a portion of the house.
FHA loan rules do not allow rentals less than 30 days, so if you have this type of loan, you will likely need to refinance.
