Can You Rent Out Your House If You Have a Mortgage?

Converting a primary residence into a rental property is a common consideration for homeowners. While it is possible to rent out a home with an existing mortgage, this transition requires understanding contractual obligations, regulatory requirements, and financial implications. Careful due diligence ensures compliance and avoids potential pitfalls.

Understanding Your Mortgage Agreement

Reviewing your existing mortgage agreement is a first step. Most residential mortgages include an “occupancy clause,” stipulating the borrower must occupy the home as their primary residence for a specified period after closing, typically six to twelve months. This clause protects lenders, as primary residence loans often have more favorable terms. Violating this requirement can lead to penalties, a higher interest rate, or the lender demanding immediate loan repayment. In severe cases, inability to repay could result in foreclosure.

Another provision to examine is the “due-on-sale clause,” which allows the lender to demand full repayment if the property’s ownership is transferred. While this clause primarily applies to a sale, some lenders might interpret converting to a rental as a triggering event, especially if the property is transferred into a separate legal entity like an LLC. Although lenders rarely invoke this clause for a simple rental conversion, it remains a contractual right. Homeowners should contact their mortgage lender to clarify their policy regarding rental conversions before proceeding.

Adjusting Your Insurance Coverage

Transitioning a home to a rental property requires a change in insurance coverage. Standard homeowner’s policies do not cover damages or liabilities from rental activities. Renting without appropriate insurance can lead to denied claims, leaving the homeowner financially exposed. Therefore, switching to a landlord insurance policy, often called dwelling fire insurance, is necessary.

Landlord insurance is tailored to protect the property owner’s financial interests when a home is rented. This policy covers the physical structure and detached structures against perils like fire, wind, and hail. It also provides liability protection, covering legal fees and medical expenses if someone is injured on the property. Many policies include coverage for loss of rental income if the property becomes uninhabitable due to a covered event. Disclose rental intentions to your insurance provider to ensure proper coverage and avoid future claim denials.

Navigating Local Regulations and Homeowners Associations

Homeowners must investigate local regulations and Homeowners Association (HOA) rules governing rental properties. Municipal ordinances vary by city and county, often including specific requirements. These may encompass zoning laws, mandatory licensing, and compliance with building codes. Researching local government departments helps identify applicable rules and ensures compliance, avoiding fines or legal issues.

Homeowners Associations often impose rules regarding rental properties through their governing documents. These HOA regulations can include:
Limitations on the number of homes allowed to be rented.
Minimum lease terms.
Requirements for tenant screening and approval.
Waiting periods before a unit can be rented out.
Review your HOA’s governing documents and communicate with the board to understand any restrictions or approval processes.

Financial and Tax Considerations

Converting a personal residence to a rental property carries financial and tax implications requiring careful planning. All rental income received, including regular rent payments and certain tenant-paid expenses, must be reported to the IRS. This income is taxed as ordinary income and reported on Schedule E (Supplemental Income and Loss) of Form 1040.

Landlords can deduct “ordinary and necessary” expenses incurred in managing and maintaining the property, which reduces taxable rental income. Deductible expenses include mortgage interest, property taxes, insurance premiums, repairs, maintenance, utilities, advertising, professional fees, and travel related to property management.

Depreciation is a non-cash deduction for rental property owners. It allows owners to recover the building’s cost, excluding land value, over its useful life. For residential rental property, the IRS generally sets this recovery period at 27.5 years. Accurate record-keeping of all income and expenses is important for rental property owners. Detailed records simplify tax preparation and provide documentation for an IRS audit.