Yes, assuming you’ve closed with a mortgage for a primary residence, you can typically rent it out after one year of primary residency. Additionally, most mortgage notes will have language requiring you to move-in and begin using the home as your principal residence within 60 days of closing.
If your intention was to rent out the property immediately, then you should have notified your lender that you were applying for a loan for an investment property. Because of the higher risk associated with an investment property, you would then have had to pay higher rates or more fees to compensate the lender for the risk.
However, the language in most mortgage notes will have exemptions for extenuating circumstances, or ways for you to get approval in writing from the lender to get an early out of the primary residency requirement. Read more below to learn more, and leave us a comment if you have any questions!
Sample language from mortgage note
The following paragraph from a sample mortgage note for a jumbo loan for a condo in NYC explains in relatively simple language the borrower’s obligations on residing in the property after closing. Please note that this specific language is actually quite lenient, as the lender is prohibited from refusing an exemption unless the refusal is reasonable.
Borrower’s Obligations to Occupy The Property
I will occupy the Property and use the Property as my principal residence within 60 days after I sign this Security Instrument. I will continue to occupy the Property and to use the Property as my principal residence for at least one year. The one-year period will begin when I first occupy the Property. However, I will not have to occupy the Property and use the Property as my principal residence within the time frames set forth above if Lender agrees in writing that I do not have to do so. Lender may not refuse to agree unless the refusal is reasonable. I also will not have to occupy the Property and use the Property as my principal residence within the time frames set forth above if extenuating circumstances exist which are beyond my control.
Pay specific attention to the language stating that the 1 year minimum term of primary occupancy begins only after you’ve moved in.
What are some examples of extenuating circumstances?
Extenuating circumstances that might allow you to rent out a property earlier than the 12-month requirement will depend on the specific lender and the type of mortgage you have. However, some common examples of extenuating circumstances that lenders may consider include:
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Job Relocation: If you are required to relocate for work purposes and the distance from your new job is beyond a certain radius from your current home, your lender may allow you to rent out your property.
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Medical Reasons: If you or a family member experiences a severe medical condition or disability that requires a move to a different type of property or care facility, your lender may allow you to rent out your property.
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Military Service: If you are a member of the military and are required to move to a new location due to a change in your station or deployment, your lender may allow you to rent out your property.
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Divorce: If you are going through a divorce and are required to move out of your current home, your lender may allow you to rent out your property.
It’s important to note that these circumstances do not automatically allow you to rent out your property before the 12-month requirement. You will need to discuss your situation with your lender and provide supporting documentation to prove that your circumstances are indeed extenuating.
Primary vs investment property mortgages
Interest rates for a primary residence mortgage are typically lower than those for an investment property mortgage because the lender perceives the risk associated with these two types of loans differently. Lenders view primary residence mortgages as less risky than investment property mortgages because primary residences are typically viewed as more stable assets. This is because the borrower is more likely to prioritize paying their primary residence mortgage in order to keep their home, rather than their investment property mortgage if they run into financial difficulties.
Because of the additional risk, lenders often loan lower loan-to-value ratios (LTVs) for investment properties vs primary residences. The LTV is the amount of the loan divided by the appraised value of the property. A lower LTV means that the borrower has more equity in the property, which gives the lender a greater degree of security in the event of default.
Lenders often believe that primary residences will have lower LTVs over time as homeowners are more incentivized to build their home equity with principal paydowns.
Furthermore, an investor may have multiple properties and mortgages, which increases the likelihood of default. Additionally, an investment property may not generate rental income as projected, leading to cash flow issues that can impact the borrower’s ability to make mortgage payments. If the borrower defaults, the lender may not be able to recoup their investment through foreclosure, as investment properties may be more difficult to sell than primary residences.
To compensate for the increased risk associated with an investment property mortgage, lenders typically charge a higher interest rate. The lender is taking on more risk by providing financing for an investment property and must protect themselves from the possibility of default. A higher interest rate helps to offset this risk and allows the lender to earn a higher return on their investment.
Pro Tip: Investors typically buy properties through a LLC which further segregates their risk to that specific property. In contrast, lenders can typically sue a primary residence borrower if they default (and the lender knows they have other assets).
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Can I rent out my house with a VA Loan?
VA loans are not meant to be used for buying rental properties, and the VA is pretty strict about requiring borrowers to occupy the property as their primary residence. However, they do not expect the borrower to live in the house forever. Instead, the borrower must use the property as their primary residence for a set period of time, which is typically at least 12 months, as stipulated in most VA home loan agreements. VA loan agreements will also typically require the borrower to move-in to the property within 60 days of closing.
At the end of the initial occupancy period, the borrower may be able to rent out the property to a tenant, even if the tenant is not affiliated with the military. However, the borrower must still obtain approval from the VA if they wish to rent out the property for an extended period of time.
It is important to note that there is one way that a borrower can rent out a property immediately after buying it with a VA loan, and that is by purchasing a multi-family property or duplex.
In this scenario, the borrower must occupy one of the units as their primary residence, but they are free to rent out the other units to tenants as they see fit.
Overall, the primary residency requirement is an important component of the VA loan program, but there are exceptions that allow for renting out the property after the initial occupancy period has ended or by purchasing a multi-family property or duplex. As always, it is important to consult with your lender and the VA to ensure that you are following all applicable rules and regulations.
What about a Permanent Change of Station (PCS)?
A Permanent Change of Station (PCS) is an exception to the primary residency requirement for a VA loan. A PCS is a move that is ordered by the military, which typically involves a transfer to a new duty station. In this scenario, the borrower may be required to move to a new location and live in government quarters or other temporary housing for a period of time. During this time, the borrower may be allowed to rent out their primary residence without obtaining approval from the VA.
However, it is important to note that the borrower must still meet all of the other requirements of their VA loan, including making mortgage payments on time and maintaining the property in good condition. Additionally, the borrower must intend to occupy the property as their primary residence again in the future, once their PCS orders have been completed. If the borrower wishes to rent out the property for an extended period of time, they must obtain approval from the VA.
Yes, it is possible to rent out a house with an FHA mortgage, but there are specific guidelines to follow. First, if you intend to purchase a property solely for rental purposes, you will not qualify for an FHA loan. This is because FHA loans are intended for owner-occupants, not investors. When you close on an FHA loan for a property, you must sign a statement that confirms that you plan to live in the property as your primary residence within 60 days.
Furthermore, you are required to occupy the property for at least 12 months after the closing. This means that you cannot rent out the property until after you have lived there for a full year. There are some extenuating circumstances that allow you to legally leave the property before the 12 months are up, such as relocating for work.
After the 12-month occupancy requirement is met, you are free to rent out the property if you so choose. However, there are still certain rules that you must follow.
The rules that must be followed when renting out a property with an FHA mortgage are outlined in the FHA Handbook 4000.1. According to this handbook, if you want to rent out a property with an FHA mortgage, you must meet the following requirements:
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You must have occupied the property as your primary residence for at least 12 months before renting it out.
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You must inform your mortgage lender that you plan to rent out the property.
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You must comply with all local and state laws and regulations regarding renting out the property.
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You must continue to make your mortgage payments on time, even if you are not living in the property.
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You must maintain the property to a certain standard to ensure the safety and habitability of your tenants.
Additionally, the FHA has specific guidelines regarding the amount of rent you can charge and the types of rental agreements that are acceptable.
