In general, you can rent out your house even if you are still carrying a mortgage on it. However, there are several action items you should research and complete to make sure you don’t run afoul of your lender, HOA, or the IRS.
When Can You Rent Out Your House If It Has A Mortgage?
In most cases, you can rent out your house (even with a mortgage) as long as you meet these requirements:
- Your lender knows that the property will soon be a rental.
- You have lived in the home for at least 12 months if you have a VA or FHA loan (there are some extenuating exceptions. Check with your lender).
- If you do rent out your home that is carrying a government mortgage after you meet residency requirements, you will not be able to get a second loan for another home through that program, barring some very specific circumstances.
- You abide by city and HOA laws
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’s still under a loan:
- Notify Your Lender
- Check Loan Papers
- Review HOA Bylaws for Restrictions
- Study Local Landlord-Tenant Laws
- Consider Financial Implications
1. Notify Your Lender
In every circumstance, 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 breach of contract and you could be subject to large monetary 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 interest of the FBI. 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 to rent your property, be sure to adjust your homeowner’s insurance policy accordingly. You will want to have enough coverage to protect you from liability from any damage a renter might cause.
2. Check Loan Papers
You can take out a number of types of home loans, from adjustable-rate to fixed-rate, conventional to a variety of federal loans such as VA, FHA or USDA, among others. 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. Every lender could have their own language on whether such a rental is allowed, though many times you are fine to do so after living in the home for at least 12 months. The only way to know for sure—and avoid penalties and other consequences mentioned above—is to carefully read your loan papers. 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 a charge of fraud and eviction at worst.
3. Review HOA Bylaws for Restrictions
If your home is governed by a homeowners association (HOA), be sure that renting it out doesn’t run counter to the group’s bylaws. HOAs are run by volunteer boards of directors, but the day-to-day operations generally are run by an HOA management association. Speak to someone from that association for a definitive answer on whether or not renting out your unit is allowed.
Consequences for Not Reviewing HOA Bylaws
Taking steps to find a tenant without checking HOA bylaws might not be as serious as going around your actual loan documents, but you could still be setting yourself up for a legal fight and a lot of headaches.
The worst scenario is not just a fine, but 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 will lose the property altogether.
4. Study Local Landlord-Tenant Laws
Every state has different laws that regulate the relationship between a landlord and tenant. These touch on everything from leasing to eviction, and those covering your area also might include language around rentals on homes with a mortgage. Be sure that you understand these prior to seeking a prospective tenant.
All rental contracts fall under the U.S. Fair Housing Act as well as any state-specific laws governing what is and is not allowed in a landlord-tenant relationship. You cannot discriminate on the basis of:
- Race
- Color
- Gender
- National Origin
- Familial Status
- Religion
- Disability
Consequences for Breaking Landlord-Tenant Laws
Most of these laws come into play when there is a dispute between a landlord and a tenant. Be sure that you understand when you can and cannot evict a tenant, charge them late fees or keep a security deposit. Not abiding by local laws on these and other issues can mean big fines for you as a landlord.
5. Consider Financial Implications
When you sell an owner-occupied home, you retain the majority of the profits. That is a financial boon for you.
Consequences for Not Considering 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 what you paid for it. If you stop renting out the home, you will not be eligible for this write-off.
- When you, as the owner, sell the property, you will have to pay capital gains taxes on profits greater than an amount set by the government. 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 takes the equity of a property you already own and allows you to borrow a percent of that equity, usually around 75%.
It works a lot like a credit card. 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 anything else you need.
HELOCs are similar to home equity loans. A loan that is backed by your property’s equity is for a set amount without the ability to increase the money you borrow. 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 any other short time 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.
