Is It Legal to Rent Your Home Out to Pay Your Mortgage?

 legality of renting home to pay for mortgage

Maybe you’re having trouble making your mortgage payments. Maybe you just want to downsize. Or maybe you simply want to escape your everyday routine and travel the world for a year. Regardless of your circumstance, renting out your home to pay your mortgage has never been a more popular option. But before you rush to list your house on Zillow and Trulia, know that renting your home could actually land you in trouble -- if you don’t take the right precautions first. 

Check With Your Lender to Determine The Rules of Your Mortgage Agreement

Your mortgage agreement might seem like an incredibly long and boring read, but if you want to determine whether you can rent your home out to pay your mortgage, it usually has all the answers. Depending on your specific agreement, you may be able to rent out your home:

  • Freely, as you wish

  • Freely, but with conditions including getting landlord’s insurance

  • Freely, but only after paying a specified fee to your lender  

  • Only under specific, extenuating circumstances, such as financial hardship

  • Some combination of the above

After checking out your mortgage agreement, it’s usually a good idea to talk to your lender to see if there’s anything you missed.

Renting Out Part of Your Home Is Another Popular Option

Instead of renting out your entire home, you may rent a spare bedroom or guesthouse in order to help make a little extra money on the side. This trend has become especially popular with services like Airbnb, which allow homeowners to find potential renters from all over the world in just minutes.

If you’re doing this, you may not have to inform your lender, since you’ll still be using your home as your primary residence. But, if you want to be safe, it may still be a good idea to let them know.

Why You Should Opt for Landlord’s Insurance

While your lender will typically require you to have landlord’s insurance if you rent out your home, it’s a smart idea to obtain this even if it isn’t required. One of the main reasons is that if you rent out all or part of your home, your homeowner’s insurance policy may no longer be completely valid. Landlord’s insurance covers much of the same ground as a homeowner’s insurance policy, including:

  • Property damage, including theft and damage from tenants

  • Liability from injuries sustained by tenants, guests of tenants, and even trespassers

  • Damage to tenant’s property from landlord negligence (i.e. failing to fix a pipe that leads to flooding, ruining a tenant’s property)

Depending on your level and type of coverage, landlord’s insurance may also cover:

  • Loss of rental income due to property damage or natural disaster

  • Your personal property within the home

If you only rent out part of your home, getting a full landlord’s insurance policy may be overkill -- or it might not be, depending on your individual situation. For instance, Airbnb offers a Host Protection Insurance Program, which insures landlords for up to $1 million for third-party liability claims. If you think that’s sufficient, you may not want to purchase additional insurance.

If you do your research, you may be able to find small, supplemental policies that augment your regular homeowners insurance, instead of paying for a full landlord’s insurance policy. Getting a supplemental policy may be able to give you some additional protection without completely breaking the bank.

Buying a Home Simply to Rent It Out Is Against The Rules Of Many Mortgages

If you’ve lived in your home for a few years, and decide to rent it out, that’s one thing. But if you purchase a home with the intention of renting it out immediately, you could be in for an expensive surprise.

If you’re not purchasing your home with the intent to live in it yourself, the home would legally be classified as an investment property. Many mortgage lenders charge higher interest rates for mortgages on investment properties, due to the increased risk they carry. This is because a borrower is much more likely to stop paying the mortgage on an investment home when compared to a primary residence.

In addition, many lenders require borrowers to put a minimum 20% down payment on investment homes, due to the fact that it’s much more difficult (if not impossible) to obtain private mortgage insurance (PMI) on an investment property.

Lenders also often want borrowers to have six months worth of mortgage payments in the bank as a cash reserve. Often, they will want six months for the rental property, and six months for the borrower’s primary residence, to reduce the possibility that a borrower will stop paying the mortgage on their rental property in order to make the mortgage payments on their primary residence.