Can You Rent Out Your Primary Residence?

Homes in NC are appreciating in Metro areas at a rate of more than 4% right now, according to Trulia.  For folks who own a home, who are thinking they might like to buy another one – it could be a good investment to keep your current primary residence at Investment Property.  I had someone ask: Can You Rent Out Your Primary Residence?  If so, what are the rules?

Converting Your Current Primary Residence To A Rental

In NC you sign an agreement at closing that you intend to occupy a property as your primary residence for at least 12 months as part of closing.  If you are transferred with your job, or something happens and all of a sudden you need a down stairs bedroom, or maybe you have twins…  your lender will likely be OK with you not meeting the FULL 12 months, but you do sign saying that is your intention.

With home prices increasing, a $200,000 home could be valued at $208,000 a year from now.  In addition, if rents continue to be what they are reported at as a median rent of $1,445 last month in Raleigh by Trulia, deciding to rent out your Primary Residence might be a great way to earn a little income.

There are trade-offs to being a landlord. When you decide to rent out your Primary Residence and move to landlord, consider these factors.

• Contact your insurance company – As a non-owner occupied home, your current homeowner’s insurance policy no longer applies. You will need to contact your insurance company to inform them of your intentions.
• Research landlord and tenant laws – Each county is different when it comes to landlord and tenant notices. You need to understand your obligations as a landlord with regard to security deposits, tenant screening, lease agreements, etc.
• Learn the tax rules – To use the tax laws to your benefit, you should be aware of what can and can’t be claimed on your taxes. What you received for your interest deductions isn’t the same for investment properties. We had big Tax Law changes at the end of last year.  Always consult with your accountant before making a big decision, like renting your home.
• Landlords wear many hats – Being a landlord isn’t just about sitting back and collecting rent payments. Landlords can play the role of a real estate agent, a negotiator, a repairman, and at times you might be the one who has to kick someone out for not paying rent (which is the big risk).

Mortgage Guidelines When You Rent Out Your Primary Residence

Each of the different loan programs have a slight variance in the Underwriting Guidelines for purchasing a new home, and rent out your Primary Residence.

When a borrower is purchasing a new primary residence in NC and they intend to convert their current home to a rental property, we must understand how this will impact the loan based upon the Program Guidelines – in the case of Veterans, for instance, they may lose some of their Eligibility. 

Conventional Loan Underwriting Guidelines

When converting the current home to a rental property, with an executed lease agreement, we will use 75% of the lease amount to offset the current mortgage Payment.  The current mortgage payment is considered to be principal, interest, taxes, homeowners insurance, home owner association fees – the whole obligation.

If there is not an executed lease agreement, we can use 75% of the fair market rent as determined by an Appraiser. We will need to get an appraisal on your current residence and your new home, we use the Appraiser’s notes to verify that the Rent is fair for the area.

• The monthly qualifying rental income must be added to the borrower’s total monthly income. (The income is not netted against the mortgage payment of the property.)
• The full amount of the mortgage payment must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.
  • When the borrower will be qualifying with full mortgage payment for the current residence, they should explain the intent for the existing property (you literally have to write us a letter of explanation that says you decided to rent out your Primary Residence).

FHA Mortgage Loan Underwriting Guidelines

• When a borrower is converting their current home to a rental property, unless the borrower is purchasing a new primary residence more than 100 miles from the current residence, we cannot use any rental income. We must qualify the borrower with full payment on the current house, and the new house, we cannot offset the payment with Rental Income.
• When the borrower will be relocating more than 100 miles from the current residence, we must obtain an appraisal evidencing market rent and that the borrower has at least 25% equity in the property.
• We will then deduct the payment from the lesser of:
  • The monthly operating income reported on Freddie Mac Form 998 (Operating Income Statement); or
  • 75% of the lesser of:
    • Fair market rent reported by the Appraiser; or
    • The rent reflected in the lease or rental agreement.

More notes on owning more than one house with a FHA Mortgage Loan

USDA Home Loan Underwriting Guidelines

• This is pretty simple with USDA Loans.  The USDA Home Loan Guidelines state that the borrower may not own another suitable dwelling at the time of closing the USDA loan.

Veteran Home Loan Underwriting Guidelines

• The good news is that there is a provision that allows you to own two homes, and still be able to use the program.  For example, if you are stationed at Fort Sam Houston and you buy a house in San Antonio, and then you are deployed… and your spouse wants to live near family in NC.  In that situation, we can probably use your benefits to purchase the home in NC.  We must prove a “net tangible benefit” and your Spouse must live in the home for at least 6 months out of the year.  
• VA Home Loan Guidelines state that when converting the current primary residence to a rental property, in order to consider any rental amount, we must obtain an executed lease. With an executed lease, we can use 75% of the lease amount to offset the current mortgage payment.
• To Calculate Maximum Entitlement available, consider the following:
  • Was your current home purchased using your VA Home Loan Benefits?  If it was not, there’s no Entitlement issue.
  • If you still own the home, and you are renting it out – you might be able to purchase a new home using your partial entitlement, but there are several restrictions

If you have more questions about “Can You Rent Out Your Primary Residence” call Steve and Eleanor Thorne 919 649 5058.  We love working with folks moving in NC, who want to purchase their dream home!”