When you move and decide to use your old home as a rental, you may wonder how it affects your primary mortgage. The short answer is that it doesn't. Mortgages are made based on your qualifications at the time you apply. It is expected that, over a 30-year term, your situation can and will change. What will be affected is your ability to get a primary on your new home and to refinance the rental.
The Primary Mortgage
Your primary mortgage is set in stone once it closes. The only way it can change is if you refinance or modify the loan. So if you were approved on rates and terms available for a mortgage on a primary residence, the lender can’t change the terms to reflect higher investment property rates. Although this may be considered an abundance of caution, it's wise to review your note and mortgage to make sure the lender doesn’t consider renting the property an event of default. That is usually not the case, but you never know what a lender will put in an agreement, so you want to be safe.
One thing to consider when making your primary mortgage a rental is that you will potentially carry that mortgage payment along with another on your new primary residence. This can prove to be too much debt for many homeowners. Some homeowners come to an agreement with their tenants, so that the tenants make the mortgage payments. You can outline this in the lease agreement and have him either make payments directly to the lender or send them to you to pass along. Just be sure to thoroughly vet a tenant before putting that much faith in him.
Managing a rental property is difficult and risky. The success of the investment is tied directly to your ability to collect the rent. If the tenant stops paying, you can have trouble making your mortgage payments. While the loss of the tenant, or his failure to pay you, might be the contributing factor to the delinquency, that won’t matter to the lender. The house and the mortgage are in your name, making you the one responsible for the payments. If they stop because the tenant no longer pays, the lender is still going to come after you.
Mortgage terms are long and the interest rate environment can change just as easily as your own financial situation. If you come across an opportunity to refinance, be prepared for a different experience. The new loan will be underwritten as an investment property. This carries a higher rate, higher fees and stricter guidelines. You must show your rental income along with any other sources to prove that you qualify for the loan. You will find the process to be significantly more difficult once you’ve converted your primary residence to a rental.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.