Renting Out a House With a Mortgage: What You Need to Know

Transforming your home into a rental property can be a great way to make extra money, especially if you have moved to a new location or want to start building your wealth through real estate.

Still, you might be wondering, can I rent out my house with a mortgage if I am still making payments on it? For the most part, the answer is yes, but before you start the process, there are some important steps and considerations to take.

Is it Possible to Rent a House With an Existing Mortgage?

For the most part, homeowners can rent out their properties while still paying their mortgage; however, this depends on the terms of the mortgage and the lender's policies.

In most cases, if you purchased the property as your primary home and then want to rent it, you are obligated to inform your lender before proceeding any further.

This is a serious matter for lenders, since they approved a loan based on your intent to live at the property, and if you decide to rent it out, you might be in breach of the contract.

Steps For Renting Out a House With a Mortgage!

Step 1: Examine the terms of your mortgage first

It is important to understand your mortgage agreement before renting your home. Look for sentences in your agreement that state:

• Requirements for occupancy: the length of time you must reside in the house
• Rental restrictions: any prohibitions on leasing or renting
• Notification guidelines: Do you need to notify your lender beforehand?

Understanding these terms will help you avoid legal problems in the future. Each mortgage is unique because there are so many different mortgage types and mortgage lenders.

Step 2: Inform your mortgage lender

As honest communication is crucial during this process, be sure to explain your situation to your mortgage lender before proceeding with renting your property, once you understand your mortgage terms.

To avoid issues later, it is better to notify your lender of your intentions. If they discover any future breaches of agreement, the lender has the right to take actions, including, in extreme cases, calling the full amount due (loan acceleration) or initiating foreclosure.

Step 3: Understand Local Laws and HOA Restrictions

Rent regulations may apply to more than just your mortgage. Review any Homeowner Associations (HOA) rules and local laws about rentals in the area surrounding your unit. Some HOAs have rules regarding the duration and frequency of rentals, especially for short-term and vacation rentals.

Also, investigate municipal laws and HOA rental regulations surrounding your unit. 

Step 4: Get the Correct Insurance to Protect Your Property

Standard homeowner's insurance, designed for residences occupied by the owner, is not a rental operation-inclusive policy. This means that claims can be denied if damage or injury occurs while a tenant is living in your home, leaving you to cover the costs.

Before renting out your house, discuss the possibility of converting to landlord or rental property insurance with your insurance agent. Typically, this type of coverage includes:

• damage to property
• liability claims of tenants or guests
• loss of rental income under certain conditions

This is a necessary step to protect your investment and secure peace of mind.

Step 5: Setting Rent and Financial Strategies

Analyzing market patterns will allow you to determine how much to charge for rent. Do your best to check the competition to see what potential tenants are willing to pay, based on the rental's size, location, available amenities, and condition. If your pricing is too high, the rental will remain vacant. If pricing is too low, the rental will not provide you with the income you need.

Remember, rental income is not profit. You must account for expenses related to

• Mortgage payments
• Real estate property taxes
• Insurance premiums
• Maintenance and repairs
• HOA fees (if applicable)
• Property management fees (if applicable)

To account for potential vacancy periods, consider budgeting in your financial plan so rental income aligns with your outcome expectations.

Step 6: Screening Tenants and Having a Good Lease

Finding the right tenants is very important. A detailed screening process that includes credit history, proof of income, a reference check, and a previous rental history is likely to reduce future problems.

A good lease can protect both you and the tenant. A good lease would explain the terms and set clear expectations for the tenant regarding rent, utilities, and upkeep.

Step 7: Handle Reserves and Vacancies

Even strong rental markets have vacancies. In case of a gap between tenants, be sure to set enough cash aside to cover 3 to 6 months of mortgage and other expenses.

Remember to think of a rental property as a long-term hold. Make sure to plan for maintenance, remodels, and upgrades, and consider how the rental market may be shifting.

Final Thoughts!

For many homeowners, renting a property while paying a mortgage is both beneficial and financially liberating. However, it is important not to just put up a listing and hope for the best.

It is important to understand the mortgage, stay in contact with the lender, comply with the policies, protect the property, and plan financially for the best and worst.

When equipped with the right tools and perspective, you can easily convert your residence into a rental, offering long-lasting benefits, adaptability, and revenue for years to come.