You can typically rent out your house even if you still have a mortgage on it. However, there are several action items you need to research and complete to make sure you don’t run afoul of the IRS, your lender, or the HOA.
When Can You Rent Out Your House If It Has A Mortgage?
In most cases, you can rent out your house as long as you meet these requirements:
- If you have a VA or FHA loan, you must have lived in the home for at least 12 months (there are some extenuating exceptions. Check with your lender).
- If you rent out your home that is carrying a government mortgage after you meet residency requirements, you will not be able to get a second home loan through that program, barring some specific circumstances.
- You abide by city and HOA laws.
- You’ve notified the lender of your intent to rent out your property.
Requirements Before Renting Out Your House
Let’s take a look at some of the actions needed and factors that could come into play if you’re renting out a home that you’re still paying off:
- Notify Your Lender
- Check Loan Papers
- Review HOA Bylaws for Restrictions
- Study Local Landlord-Tenant Laws
- Consider Financial Implications
1. Notify Your Lender
You must let your mortgage lender know that you plan to rent out all or part of your home. This is true even if you plan to accept payment from a friend who will be using a spare bedroom as their residence.
If you search for tenants before making such a notification, it could be considered a breach of contract, and you could be subject to large financial penalties. Some lenders might not allow it at all. Others might approve if they get more information about a potential tenant, or they may require you to carry extra home insurance to cover the added liability.
Consequences for Not Notifying Your Lender
In addition to penalties, renting out a home when loan documents state that you plan to occupy the home yourself could raise the FBI’s interest. It is considered occupancy fraud to take out a loan stating the home will be owner-occupied and then use it as an investment property.
Once you receive approval from your lender, be sure to adjust your homeowner’s insurance policy accordingly. You will want to have enough coverage to protect you from liability for any damage a renter might cause.
2. Check Loan Papers
You can take out a number of types of home loans, such as adjustable-rate, fixed-rate, conventional, or a variety of federal loans, such as VA, FHA, or USDA. Every type of loan could have different rules about renting the property, so research your loan type.
| Loan Type | Requirements for Renting Out Home |
|---|---|
| Fixed rate (conventional), adjustable rate (ARM), Interest only, Jumbo |
|
| VA, FHA |
|
USDA loans do not allow for rentals. You must refinance into another type of loan before anyone other than you or direct family members can live there.
Check your particular loan papers. While lender rules vary, you are often fine to rent your house after living there for at least 12 months. The only way to know for sure—and avoid penalties and other consequences mentioned above—is to read your loan papers carefully. Having a lawyer take a look is also a good idea.
Consequences for Not Checking Loan Papers
Violating the terms of your loan agreement is a financial penalty at best and criminal fraud charges at worst.
3. Review HOA Bylaws for Restrictions
If your home is governed by an HOA, be sure that renting it out doesn’t counter the group’s bylaws. HOAs are run by volunteer boards of directors, but the day-to-day operations are often handled by an HOA management company. Speak to someone from there for a definitive answer on whether or not renting out your unit is allowed.
Consequences for Not Reviewing HOA Bylaws
The worst scenario is not just a fine; you can actually face foreclosure on your home. If your HOA specifically bans rentals and you go ahead and do so anyway, you will not only have angry tenants who have to move, but you may lose the property altogether.
4. Study Local Landlord-Tenant Laws
Every state has laws regulating the relationship between a landlord and tenant. These touch on everything from leasing to eviction, and those laws might include language around rentals on homes with a mortgage. Be sure that you understand these before seeking a prospective tenant.
All rental contracts fall under the U.S. Fair Housing Act and any state-specific laws governing what is and is not allowed in a landlord-tenant relationship. You cannot discriminate based on:
- Race
- Color
- National Origin
- Gender
- Familial Status
- Disability
- Religion
Consequences for Breaking Landlord-Tenant Laws
Most of these laws come into play when there is a dispute between a landlord and a tenant. Ensure you understand when you can evict a tenant, charge them late fees, or keep a security deposit. Not abiding by local laws on these and other issues can mean hefty fines.
5. Consider Financial Implications
Before you turn your home into a rental property, run through possible consequences with a tax accountant or lawyer to avoid surprises and be sure it makes financial sense. Things to consider:
- Rental income will be taxed as regular income. This effectively reduces your profit.
- You can write off depreciation of the value of your rental property until you have claimed the full value of the building (but not the property). If you stop renting out the home, you will not be eligible for this write-off.
- When you sell the property, you must pay capital gains taxes on any profit over the amount the government sets. That is currently $250,000 for single filers and $500,000 for married couples filing jointly.
- Money from rentals will not be used for Social Security calculations.
- Good record-keeping habits are essential when you become a landlord. You want to deduct as many expenses as possible and also report income accurately. Working with a property management group is an option.
Other Rental Options
If you check out all the paperwork and regulations and find that renting out your mortgaged property isn’t going to work, you might still have options.
Look Into A HELOC
HELOC stands for home equity line of credit. This allows you to borrow a percent of the equity you have on your house, usually around 80%.
Interest rates are usually higher than conventional loans, but you have continuing access to the money for purchasing another property to rent out, make repairs, or do anything else you need. You’re given a limit, but you only have to withdraw what you need.
HELOCs are similar to home equity loans, which give you a set amount all at once and require you to pay it back over time. These loans are considered riskier than conventional avenues.
Try Shorter-Term Rentals Such as Airbnb
Renting out your home on the weekends, when you are on vacation, or for any other short period has become quite popular. If you live near the beach, in or near a trendy city, or close to mountains, your home could command good money from travelers!
Some locales require anyone using their property as a short-term rental to be licensed. Some loans, such as an FHA loan, specifically forbid borrowers from renting their property out for a term of less than 30 days. This is another case in which it’s beneficial to have a lawyer take a look at your loan documents and also to advise you on what local laws allow.
