Can I Rent Out a House With a Mortgage?

Converting a primary residence into a rental property is a consideration for many homeowners. This decision involves navigating contractual obligations, financial implications, and legal responsibilities.

Understanding Your Mortgage Terms

Before renting out a home, review your mortgage documentation. Key documents include the original mortgage agreement, the promissory note, and the deed of trust or mortgage. These documents contain clauses that dictate how the property can be used.

The occupancy clause typically requires the borrower to occupy the property as their primary residence for a specified period, often ranging from 6 to 12 months, following loan origination. Violating this clause, particularly if done intentionally to secure a lower interest rate for an investment property, can be considered mortgage fraud. Consequences may include penalties, an increased interest rate, or the lender demanding full repayment of the loan balance, potentially leading to foreclosure.

The due-on-sale clause, sometimes referred to as an alienation clause, grants the lender the right to demand full repayment of the loan if the property’s ownership is sold or transferred. While primarily intended for outright sales, a lender might interpret renting without permission as a transfer of interest, potentially triggering this clause. This provision protects lenders from having loans with potentially below-market interest rates assumed by new parties.

Engaging with Your Lender

After reviewing mortgage documents, contact your mortgage lender’s customer service or loan servicing department to discuss converting the property to a rental. Having all relevant loan documentation prepared can facilitate the process.

Lender responses can vary, ranging from granting permission to requiring a loan modification or even denying the request. Some lenders may permit the change without altering loan terms, especially if the owner-occupancy period has elapsed. However, due to the increased risk of rental properties, the lender might require refinancing the loan into an investment property mortgage. This type of loan typically carries a higher interest rate compared to a primary residence mortgage.

Failing to inform the lender or violating mortgage terms can lead to consequences. The loan could be declared in default, triggering the acceleration clause where the entire loan balance becomes immediately due. If the borrower is unable to pay, the lender could initiate foreclosure proceedings. Documenting all communications with the lender, including dates, names of representatives, and summaries of discussions, is a prudent measure to protect one’s interests.

Financial and Tax Considerations

Converting a primary residence into a rental property introduces financial and tax responsibilities. Rental income received from tenants is generally taxable. This income is reported on Schedule E (Form 1040) of the federal tax return.

Landlords can deduct expenses incurred in managing and maintaining the rental property. These deductible expenses commonly include mortgage interest, property taxes, and insurance premiums. Other operational expenses such as utilities, repairs, maintenance, advertising costs, and professional fees for services like property management, accounting, or legal advice are also deductible.

A tax benefit for rental properties is depreciation, which allows for the recovery of the property’s cost over its useful life. Residential rental properties are generally depreciated over 27.5 years using the General Depreciation System (GDS). Only the building and improvements can be depreciated, not the land value. Depreciation is reported on Form 4562 and Schedule E.

When the property is eventually sold, any depreciation claimed during the rental period may be subject to “depreciation recapture,” where it is taxed at a rate of up to 25%. If the property was a primary residence, the capital gains exclusion applies if the owner lived in the home for at least two of the five years preceding the sale. Converting to a rental impacts this exclusion, especially concerning depreciation recapture.

Legal and Operational Aspects

Becoming a landlord involves adhering to legal and operational requirements. Landlord-tenant laws regulate the relationship between property owners and renters, covering aspects such as lease agreements, security deposits, eviction procedures, and tenant rights. These laws vary significantly by state and locality, necessitating compliance with specific regional statutes. Federal laws, including the Fair Housing Act, prohibit discrimination in housing based on protected characteristics, and the Fair Credit Reporting Act governs the use of tenant credit history.

A legally sound lease agreement outlines the terms of the tenancy. It should include the full legal names of all parties, a detailed description of the property, the exact rent amount, due dates, and acceptable payment methods. Provisions for security deposits, including the amount, conditions for return, and potential deductions, must be clearly stated. The lease should also define the lease duration, renewal terms, and procedures for termination by either party. Responsibilities for maintenance and repairs, rules regarding property use, and consequences for lease violations are also standard components.

Existing homeowner’s insurance policies typically do not provide adequate coverage for rental activities. Convert homeowner’s insurance to a landlord or rental property insurance policy. Landlord insurance provides coverage for the physical structure of the property, loss of rental income due to covered perils, and liability protection for injuries that occur on the property. This specialized insurance is generally more expensive than homeowner’s insurance due to the increased risks associated with tenant-occupied properties.

Property management involves marketing the property, screening prospective tenants, collecting rent, and handling maintenance requests. Landlords can choose to self-manage or hire a professional property management company. Tenant screening is a detailed process that typically includes reviewing rental applications, conducting credit and background checks, verifying income, and checking rental history. Proper tenant screening helps mitigate risks associated with renting.