Will Your Current Mortgage Allow You to Move Out of Your Home and Rent It Out?

You’ve bought a new home and you like the idea of becoming a landlord, so you decide to rent out your former home instead of selling it.

Before you put up the “For Rent” sign, you need to find out if your mortgage will allow such an arrangement.

Many loan products put restrictions on the use of the property and require that the owner be the resident as well. Here's a look at some of the most common mortgage products and their restrictions.

FHA Loans

Loans from the Federal Housing Administration, known as FHA loans, are the most popular choices for first-time buyers.

The low down payment requirements and reduced credit restrictions make this loan option an appealing choice. However, it’s expected that the person will live in this home, so it can’t be purchased for a rental property.

On the other hand, if you’ve lived in the home for at least one year, you're allowed to move out and turn it into a rental property without breaking the FHA rules.

You won’t qualify for a second FHA loan, except in special circumstances, such as outgrowing the home or moved farther than commuting distance.

FHA loans do allow you to purchase a multi-family dwelling such as a duplex, but only if you live in one of the units.

You must continue to live there for a year to meet the requirements of the loan.

The terms for a loan from the U.S. Department of Veterans Affairs, also known as a VA loan, are the same as for an FHA loan.

Don’t try to sneak the rental by anyone, either, because the FHA can do spot checks to ensure the owner is living in the property during the required term.

USDA Loans

A USDA loan is a home loan offered in rural areas and administered by the U.S. Department of Agriculture.

It can be subdivided into a guaranteed loan, which is most common, and a direct loan for those with very low incomes.

This loan varies from other mortgages in several ways, including the length of time that the home must be owner-occupied.

While this doesn’t mean you can never rent it out, you aren’t allowed to purchase it for such as purpose.

If you outgrow the property and have owned it for three years or longer, you're allowed to use it as a rental.

This only applies to the USDA guaranteed loan; the direct loan will not allow the property to be used as a rental.

Conventional Loans

You would think conventional loans would be less restrictive since they don’t have the same government guidelines, but they can be even more limiting.

Any conventional loan that's backed by Fannie Mae or Freddie Mac requires that the home must also be lived in before you’re allowed to rent it out.

However, you shouldn’t assume that after the one year is up, you’re free to do whatever you want.

Lenders often add their own requirements to those of the agencies backing the loan.

These are called overlays, and often have more restrictions.

For instance, lenders may not allow the home to be used as a rental property for the life of the loan.

Some lenders call the note due as soon as the rental begins.

The owner must then refinance with a new loan product, which has a higher interest rate.

Additionally, many state assistance programs that help buyers with down payments or other terms of the loan may have their own requirements and restrictions on the use of the property.

Before you consider renting out your home, talk to your lender.

If the loan has been sold, which happens with many mortgages, you’ll have to check with the current lender.

Because the answer may depend on your exact circumstances, you’ll want to provide detailed information, including the reasons that you’re moving and that you're not selling the property.

It’s also a good idea to talk with an experienced real estate attorney who can help you by reading the terms of your loan agreement.

What to Do If You Want to Rent Out Your Home

Many people can’t afford to pay two mortgages.

If you’ve bought a new home before your current one sells, you’ll need to figure out how to manage both payments.

You may be allowed to refinance under a new loan that permits your old home to be used as a rental. Expect rates to be higher on this type of loan.

The best time to find the answers to your questions is before you purchase a new home.

If you work with the same lender to purchase the second property, they can tell you how to make your first home a rental without breaking any loan restrictions.

Lenders aren’t the only restrictive entity you have to worry about.

Depending on where you live, the homeowners’ association may pose restrictions about having a rental property, which would supersede any allowances you have from the lender.

That’s why it’s a good idea to talk with an attorney who knows the area and local laws, as well as the loan regulations.

Find out terms before you make any decisions to ensure you aren’t stuck making two mortgage payments for the long term.

Posted on Feb 24, 2016


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