I own but no longer occupy a property with an interest only mortgage. Am I allowed to rent out my property considering that I have an interest only mortgage?
As long as the information you provided on your loan application was accurate and you lived in the property for at least a year after your mortgage closed you should be able to move out of the property and rent it out. They type of mortgage program you have -- interest only, adjustable rate mortgage (ARM) or fixed rate mortgage -- does not affect your ability to rent out a property that you own.
If you decide to rent out your home, we recommend that you obtain a rental property insurance policy as opposed to a standard homeowners insurance policy that covers a home that you live in. The coverage levels are different and a rental property policy provides better protection in the event of property damage.
Please note that when you take out the new insurance policy, your lender may become aware that you are using the property as a rental. If you have not lived in the property for a year -- or the required time period specified in your mortgage note, if applicable -- this may cause an issue with your lender. Be sure to review your mortgage note carefully to understand the potential consequences that may arise if you rent out the property.
Another point to consider if you rent out your property is that it may be more challenging to refinance your mortgage in the future. If you want to refinance a loan on a rental property you need a non-owner occupied mortgage. The mortgage rate and closing fees for a non-owner occupied mortgage are usually higher than the rate and costs for a mortgage on a home you live in as your primary residence or second home. Additionally, you may be required to have more equity in the property to qualify for the mortgage.
The table below shows rental property mortgage terms. We recommend that you shop multiple lenders to find the lowest combination of mortgage rate and closing costs. There tends to be greater variation in loan terms for rental properties which makes shopping multiple lenders more important.
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If you want to use the rental income from the property to qualify for the refinance you are usually required to provide one-to-two years of tax returns that verify the income in addition to property leases and other documentation. If you expect to refinance the mortgage immediately after you move out and rent the property, this may be challenging because you do not have the minimum required rental income history.
If you do have the required rental income history and the property is cash flow positive, this can help you qualify for the mortgage. If the property loses money, however, this makes qualifying for the refinance more challenging. In this scenario, you need to make enough money to absorb the loss on the rental property and afford the mortgage or rent on your primary residence.
Lenders also usually require that rental property mortgage applicants demonstrate a successful track record as a landlord to qualify for a non-owner occupied loan. It is helpful to show that you have a proven ability to manage a rental property including the unexpected costs, maintenance issues and occupancy changes.
In closing, while it is certainly possible to move out of your home and rent it out, be sure to consider how your decision impacts your current and potential future mortgage.
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