Buying a house is a large financial commitment. Although you may have bought your house with the intention of occupying it yourself, your circumstances may have changed just after you signed the mortgage documents. For example, you may have lost your job and found a new one in another city. Or, you may have just found out your wife is pregnant with twins and the house you just bought is too small. Selling a house in which you have little equity may not be financially feasible.
You consider renting that house instead.
But can you? You got your mortgage based on the assumption that you were going to live there. Can you turn that new place into a real estate investment instead?
To rent out your house, you will likely need to obtain permission from your mortgage lender. Some lenders, such as VA and USDA, do not allow owners to rent out properties bought with a VA loan. Most mortgage lenders require that you occupy the house for at least some time before renting it out to someone else and also may have other requirements that you must meet even after that time has passed. The answer, then, is that you probably cannot rent out a house you just bought. Some lenders will consider extenuating circumstances; you can discuss your situation to determine if the lender will make an exception in your case.
Lenders typically charge more for mortgages for homes that will be rented rather than owner-occupied because loans for investment properties are riskier. Borrowers are less attached to houses that are business deals; in fact, investors are one-third more likely to dump mortgages than owner-occupiers, according to The Mortgage Reports. Freddie Mac and Fannie Mae, the two agencies that set rules and fees for most conventional mortgages have two sets of rates, one for owner-occupied and one for investment properties. For example, an investment property might carry additional fees or an interest rate of 0.5 percent more than the owner-occupied property, according to The Mortgage Reports. Investment properties also often require a down payment ranging from 15 percent to 25 percent, while an owner-occupied primary residence may require no down payment up to 5 percent, according to My Mortgage Insider.
Because of the risks involved and the rate differential, most lenders require that buyers with owner-occupied financing sign documents certifying that they will occupy the property. So, if you've just bought your home, carefully review all the documents signed at closing to see if you signed such certification or if the lender incorporated any stipulations. If you did sign such a certification or agreed to a loan with stipulations against renting the property, then you cannot rent it unless you comply with the lender's terms for doing so.
How long do you have to live in a house before you can rent it out?
This varies depending upon the lender and program.
- FHA loans and conventional loans backed by Fannie Mae require that you live in the house for 12 months before you can rent it out. The Department of Housing and Urban Development sometimes does spot checks to ensure compliance for those with FHA loans, according to SF Gate.
- Veterans who have financed their house with a VA loan may never rent it out with that loan. The VA, however, does allow the veteran to refinance the home with an Interest Rate Reduction Refinancing Loan. This loan only requires that the veteran have previously occupied the home.
- USDA loans, which are offered in rural areas, require that buyers obtaining financing through the guaranteed program live in the house for three years before renting it. Those who receive USDA direct loans may not rent out the property unless they refinance it with a different type of loan. Even if you meet the residency requirement, you may still be required to get permission from your mortgage company to rent the home.
Is it illegal to rent out a house without a buy to let mortgage?
In many cases, yes. Buy-to-let mortgage is a term for a loan than enables a landlords to buy a house and rent it out. These mortgages have different terms than mortgages for buyers who will occupy their house. If you sign documents saying that you will occupy the home for a certain period of time, but rent your home before that time, you could be charged with fraud. Likwise, if any of your loan documents specify that you must tell the mortgage company if you rent your home and you fail to do so, you could be charged with fraud. If you have financed your home with an FHA loan and rent your home within the first 12 months, you could be found in criminal and civil violation of the federal Real Estate Settlement Procedures Act, according to SFGate.
What happens if you rent out a property without a buy to let mortgage?
That depends. If you've failed to comply with any lender stipulations or certified that you would occupy the home, then you could face criminal charges and go to jail. More likely, however, you will face civil penalties which will cost you financially. In some cases, lenders will call in the loan, meaning that you'll have to pay the full amount, as soon as they discover you've rented the property.
If, however, you have complied with all the stipulations, notifying your mortgage company if you need to and meeting any additional requirements the company might set, then you are free to rent the property. You will need to contact your insurance carrier, however, because the homeowners' insurance policy that you bought for an owner-occupied home is likely invalid for one that is rented to someone else.
Do I need to notify my mortgage company if I rent out the house?
That depends on your loan program and the documents you signed at closing. Read all the documents thoroughly to see whether the lender made any stipulations regarding renting your home or whether you signed documents indicating you would live in the home. Then act accordingly.
Can first-time buyers get buy to let mortgages?
Yes, as long as they otherwise qualify. Mortgages to buy rental homes are granted without regard to whether you are a first-time buyer. Investment loans do require higher credit scores than owner-occupied loans. For investment loans, if you put less than 25 percent down and have a debt-to-income ratio (DTI) above 36 percent, your minimum credit score is 700, according to HSH. If you put at least 25 percent down, and your DTI is 36 percent or lower, that minimum score drops to 640. However, if the property generates at least enough income to pay the mortgage, some commercial lenders will be less concerned about your credit score.