What Will Happen If I Rent Out My Mortgaged Property?

Growing numbers of Americans rent out their homes. In 2018, Builder Magazine reported that 35 percent of single-family homes in the United States were occupied by renters. This number represents 15 million homes. But tread carefully if you want to lease out a mortgaged home. Your lender and your homeowner's association (HOA) may both balk at the move, and you’ll have to crunch some numbers to see if it makes financial sense.

Renting a mortgaged home could change the terms of your loan, since some banks and mortgage guarantors limit rentals in the initial loan agreements. With loans backed by the U.S. Department of Veterans Affairs and the Federal Housing Authority, for example, the owner must occupy the home for at least one year before renting out the property. Conventional loans backed by Fannie Mae and Freddie Mac also require at least one year of owner occupancy before renting. State assistance programs for first-time buyers may have lengthier restrictions.

A mortgage holder may call the note due upon rental, forcing the owner to refinance at a higher interest rate. If your original lender sold your mortgage to a new lender, the rules for renting out the mortgaged home may have changed. Even if you don’t plan on renting out your home right away, get familiar with your lender’s policies in case you must lease your property later.

Your mortgage woes may not limit themselves to the property you're renting. If you are living in the home, you'll still need a place to live if you move out and rent the house to someone else. Unless your finances are in excellent shape, you could have trouble buying another home. Lenders may hesitate to approve your mortgage given that you already have one.

Even if you own your home outright, some HOAs limit rentals or forbid them completely. Run afoul of those rules and you could face fines. Some owner associations require input into tenant screening, lease approval and community orientation prior to tenant occupancy. Some associations cap the percentage of rentals allowed in the community at any given time, while others require a minimum lease period of six months or more. Also, association rules may bar you from using common areas, such as swimming pools and recreational areas, once you rent out your home. They might also prohibit your tenants from using neighborhood amenities, which could discourage prospective renters from leasing your property.

Your homeowner's insurance policy doesn’t provide enough coverage if you rent out your home. You’ll need to convert your home owner's insurance policy to a landlord or business owner’s policy for extra liability coverage and to pay for lost rent if the home is uninhabitable due to natural disaster or repair work. Other potential business costs include advertising, property management fees and legal expenses in cases of unpaid rent or landlord-tenant disputes. Competing with other rentals could also require upfront renovation costs. To attract residents, a rental must be in equal or better condition than a home for sale, because renters don’t have as much leeway to improve a property with fresh paint or new flooring. Furthermore, renters are less likely to take care of a property already in poor condition.

Renting may be worthwhile if you don’t face tougher loan terms or HOA restrictions. At tax time, landlords can deduct property depreciation, maintenance expenses, mortgage interest and property taxes. Renting is also an option for a homeowner who must make a job-related move to another city for a year or two, but wants to return home. For a homeowner who must move permanently but is underwater on the mortgage, renting is a bridge to appreciation. Renting the property out allows you to wait and sell the home when the housing market improves.

Determine the rent you can charge by scouring newspapers and online classified ads for the going rate in your neighborhood. Once you know the rent you can charge, subtract expenses, including the mortgage payment, insurance, property taxes and utilities. Plan to set aside 30 percent of the rent in a reserve account to cover repairs or other unexpected expenses, and take away another 3 to 10 percent if you hire a property manager. Factor in income taxes, and what's left is your potential profit. Remember, too, that you'll have to pay capital gains tax when you sell the property if you haven't lived in it for at least two years out of the previous five. Poor planning could cost you, so think carefully before taking on tenants.