Can I Rent My House If I Have a Mortgage?

Renting out a home with a mortgage is a common consideration for many homeowners. This decision requires understanding various financial, legal, and practical implications to ensure a smooth and compliant transition.

Reviewing Your Mortgage Terms

Understanding your existing loan agreement is a significant aspect of renting out a mortgaged home. Most mortgage contracts for primary residences include an “owner-occupancy clause,” which stipulates that the borrower must reside in the property for a certain period, typically 6 to 12 months, after closing. Violating this clause by renting out the property before the stipulated period can be considered mortgage fraud and may lead to penalties, a change to a higher interest rate, or even a demand for immediate repayment of the entire loan.

Reviewing your specific mortgage agreement for any clauses related to occupancy or rental restrictions is a necessary first step. This document will outline the precise terms of your occupancy requirement and any prohibitions or conditions related to renting the property. Some lenders may allow for exceptions, especially if there are legitimate changes in circumstances, such as a job relocation.

Contacting your mortgage lender directly is the next step to discuss your intentions. You should have your loan number and property address readily available. The discussion will involve exploring potential modifications to your loan, such as adjusting the interest rate to reflect the property’s new status as an investment. Lenders typically charge an additional 0.5% to 1% in interest for investment properties.

It is important to document all communications with your lender, including dates, names of representatives, and summaries of discussions and agreements. This record will be valuable for future reference and compliance. Your lender’s approval is generally required to convert your home to a rental property, and they may require you to refinance if they do not approve your request.

Navigating Legal and Financial Requirements

Converting a primary residence to a rental property introduces legal and financial obligations beyond your mortgage terms. These considerations ensure compliance with regulations and protect your investment.

Insurance

Homeowner’s insurance policies are designed to cover owner-occupied properties, protecting the structure, personal belongings, and providing liability coverage. When you convert your home to a rental, your standard homeowner’s insurance policy typically does not provide adequate coverage. Therefore, it is necessary to switch to landlord’s insurance, also known as rental property insurance or dwelling fire insurance.

Landlord’s insurance provides specific coverage for rental properties, including protection for the building and other structures, liability for tenant injuries on the property, and potential loss of rental income if the property becomes uninhabitable due to a covered event. This type of policy generally costs about 25% more than a standard homeowner’s policy, with an average premium around $1,400 annually, compared to $1,050 for homeowners insurance. Contact your insurance provider to discuss converting your policy and ensuring sufficient coverage, as keeping a homeowner’s policy on a rental property could result in denied claims.

Local Regulations

Researching local landlord-tenant laws, zoning ordinances, and required permits or business licenses is a necessary step. Many municipalities require landlords to obtain a residential rental license or a business license to operate a rental property. These requirements often involve compliance with local housing codes and may necessitate regular property inspections.

Information about these requirements can typically be found on local government websites, such as city or county planning departments. Common documentation required for such permits includes:

• Proof of ownership
• Proof of insurance
• The rental agreement
• Property details

Fees for rental licenses can vary widely, potentially including application, inspection, and annual renewal fees.

Homeowners Association (HOA) Rules

If your property is part of a homeowners association, reviewing the HOA’s covenants, conditions, and restrictions (CC&Rs) is important. These documents outline rules regarding property use and may include rental restrictions. Common restrictions include rental caps, minimum lease terms (e.g., prohibiting short-term rentals), and requirements for tenant screening or approval.

HOAs may require landlords to provide a copy of the lease agreement or submit rental applications for approval. Failure to comply with HOA rental restrictions can result in fines or other legal consequences. Contact your HOA board or management directly to clarify rental guidelines and avoid conflicts.

Tax Implications

Rental income is generally taxable. The Internal Revenue Service (IRS) provides guidance on reporting rental income and expenses in Publication 527, “Residential Rental Property.” This publication clarifies that rental income includes regular rent payments, advance rent, payments for lease cancellations, and tenant-paid expenses.

You can deduct many common expenses associated with renting your property, which can reduce your taxable income. Deductible expenses include mortgage interest, property taxes, insurance premiums, repairs, and depreciation. Depreciation allows you to recover the property’s cost over its useful life, typically 27.5 years. Keep meticulous records of all rental income and expenses for accurate tax reporting. Consulting a qualified tax professional is recommended to understand tax obligations and maximize deductions.

Preparing for Tenancy

After addressing mortgage, legal, and financial prerequisites, preparing the physical property and formalizing the landlord-tenant relationship are the next steps. These actions ensure the property is ready for occupancy and the rental agreement is legally sound.

Property readiness involves ensuring the dwelling is safe, functional, and appealing for prospective tenants. This includes completing necessary repairs and performing routine maintenance. All utilities and major appliances should be in good working order. Installing required safety features, such as smoke detectors on every level and in each bedroom, and carbon monoxide detectors near sleeping areas, is also important for tenant safety. Before tenants move in, all personal belongings must be removed, and the property should be thoroughly cleaned.

Thorough tenant screening is a necessary process to find reliable renters. This typically includes:

• A credit check, providing insight into financial responsibility and payment history.
• A background check, identifying any criminal history.
• Employment verification, confirming job status and income stability.
• Contacting references from previous landlords for information on past rental behavior.

Adherence to fair housing laws is important throughout the screening process to avoid discrimination.

A comprehensive and legally sound lease agreement is the foundation of the landlord-tenant relationship. This document should clearly outline:

• The lease term, specifying start and end dates.
• The rent amount, due date, and accepted payment methods.
• Security deposit details, including amount, holding, and return conditions.
• Responsibilities for maintenance and repairs.
• Other clauses like pet policies, late fees, conditions for landlord entry (typically requiring 24 to 48 hours’ notice except in emergencies), and termination clauses.

It is important that the lease agreement complies with all applicable landlord-tenant laws, which vary by jurisdiction.