Renting out a house with a conventional loan is allowed, but the mortgage you signed almost certainly requires you to live in the home as your primary residence for at least 12 months first. After that year, you can convert the property to a rental by notifying your loan servicer, switching to a landlord insurance policy, and handling the tax and local-permit side. Renting sooner is possible in narrow circumstances, and it takes documentation and lender approval.
The 12-Month Occupancy Rule
Your mortgage or deed of trust contains an occupancy clause. On the standard Fannie Mae/Freddie Mac uniform document, it requires you to move in within 60 days of closing and use the home as your principal residence for at least one year. Fannie Mae’s servicing guide refers directly to “the 12-month occupancy requirement for a principal residence” when it addresses changes in property status.1Fannie Mae. Allowable Exemptions Due to the Type of Transfer
That clause is the price of the better loan terms. Owner-occupied mortgages come with lower rates and smaller down payments than investment property loans, which typically require 15–25% down and carry rates roughly half a percentage point or more above primary-residence rates. The occupancy requirement is how the lender keeps that pricing honest.
Once the 12 months have passed, most conventional loans do not prohibit you from renting. Your interest rate stays locked in, and the lender generally cannot adjust your terms just because you’ve moved out. That locked rate is often the biggest financial reason to convert the home you already own rather than buy a separate investment property at today’s rates.
When You Can Rent Before the Year Is Up
Life doesn’t always cooperate with a 12-month timeline. Lenders will consider early conversion when you can show the change wasn’t planned at closing. The situations servicers commonly accept:
- Job relocation far enough from the property that commuting is impractical. Many lenders use 50 miles as a benchmark, though the specific threshold varies.
- Family changes, such as the birth of multiples, taking in an elderly parent, or a divorce that makes the current home unworkable.
- A medical condition that requires a different climate, proximity to a treatment facility, or a more accessible home.
- Financial hardship — job loss or a major income drop — where renting the property helps you stay current on the mortgage.
The lender wants proof your intent was genuine when you signed. If you bought the house in March and listed it for rent in May, expect skepticism. A transfer letter dated after closing, or medical records showing a new diagnosis, tells a different story.
Active-Duty Military
Service members get more flexibility. Fannie Mae treats a service member who is temporarily absent on military orders as still meeting the owner-occupancy requirement.2Fannie Mae. Occupancy Types With Permanent Change of Station orders, most lenders will approve rental conversion once you send a copy. A spouse or dependent living in the home can also satisfy the occupancy requirement during your absence. For single service members on deployment, showing a valid intent to return after the tour usually meets the standard.
How to Notify Your Loan Servicer
Even after the one-year mark, tell your servicer before placing tenants. Some borrowers skip this step and nothing happens, but the notification creates a paper trail that protects you if the property’s status is ever questioned.
Pull a recent billing statement for your loan number and the servicer’s contact information. Call the servicing department, explain that you’re converting to a rental, and ask what they want in writing. Most servicers ask for a brief letter stating when you plan to vacate and why. If you’re renting before the one-year mark, include documentation of the qualifying life event.
Some servicers accept uploads through an online portal; others still want fax or certified mail. After review, you should get written confirmation that your file has been updated. Keep it. If the loan is later sold to a new servicer that questions the occupancy status, that confirmation is your proof the change was disclosed and accepted.
What Happens If You Rent Without Permission
Renting the property early without telling your lender is where things get serious. The most common response is the acceleration clause: the full remaining loan balance becomes due immediately. If you owe $300,000 and can’t produce that amount, the lender can start foreclosure. Most borrowers caught renting early are able to work something out with the servicer, especially with a legitimate reason for the move, but the contractual right to call the loan shapes the conversation.
Deliberate deception — buying a home with no intention of living there, solely to get the primary-residence rate — is treated under federal law as a form of bank fraud. A knowingly false statement on a mortgage application can carry fines up to $1,000,000 or up to 30 years in prison.3Office of the Law Revision Counsel. 18 USC 1014 – Loan and Credit Applications Generally Prosecutors rarely go after a homeowner who rented a few months early because of a job change; the statute targets people who systematically lied to accumulate rental properties at owner-occupied rates. Lenders do report suspected fraud to federal agencies.
Switching to Landlord Insurance
Your homeowners policy covers an owner-occupied residence. Once a tenant moves in, that coverage is typically void for tenant-related claims. You need a landlord policy (sometimes called a DP-3), which is built for rental properties.
A landlord policy covers the structure against the same perils as a homeowners policy — fire, wind, hail — and adds fair rental value coverage. If a covered event makes the property uninhabitable, that coverage reimburses lost rent while repairs are underway, usually for up to 12 months, so the mortgage stays manageable while no rent is coming in.
Landlord policies don’t cover a tenant’s belongings; that’s what renters insurance is for, and requiring it in the lease is a smart move. You’ll list your mortgage lender as the loss payee on the new policy, which most mortgage agreements require. Expect to pay roughly 15–25% more than your homeowners policy, since rental properties carry more liability exposure and higher claim rates.
HOA Rules and Local Rental Permits
Two things trip up first-time landlords, and both can override the lender’s blessing.
If the property is in an HOA, the CC&Rs may limit your ability to rent. Common restrictions include rental caps that limit the percentage of units that can be rented at any time, minimum lease terms that prohibit short-term rentals, and waiting periods that prevent new owners from renting right after purchase. Rules vary enormously between associations, and violations can bring fines or forced lease termination. Read the CC&Rs before you sign anything with a tenant.
Many cities and counties also require a rental permit, business license, or property registration before you place tenants. Some jurisdictions have no registration at all; others require annual inspections, lead paint disclosures, or certificates of occupancy. Your local building or housing department can tell you what applies. Skipping this step can bring fines and, in some places, an order to stop renting until you’re in compliance.
Tax Consequences of Converting to a Rental
Converting changes your tax picture in three ways, and the timing matters more than most owners realize.
Rental Income and Expenses
Rental income goes on Schedule E of your federal return. You can deduct ordinary expenses against that income, including mortgage interest, property taxes, insurance premiums, repairs, management fees, and depreciation.4Internal Revenue Service. Instructions for Schedule E (Form 1040) These deductions often offset a large share of the rent, sometimes producing a paper loss while the property still generates positive cash flow.
Depreciation Is Mandatory
Once the property is placed in service as a rental, you must depreciate the building (not the land) over 27.5 years using the straight-line method. Your depreciable basis is the lesser of the property’s fair market value on the date of conversion or your adjusted basis — generally what you paid, plus improvements, minus any prior casualty losses.5Internal Revenue Service. Publication 527, Residential Rental Property Depreciation is not optional. The IRS recaptures it when you sell whether you claimed it or not, at a 25% rate.6eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
Protecting the Capital Gains Exclusion
This is the piece that catches people off guard. When you sell a primary residence, you can exclude up to $250,000 in capital gains ($500,000 if married filing jointly) from federal income tax, as long as you owned and lived in the home for at least two of the five years before the sale.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence That five-year window is a countdown. Convert to a rental and hold for more than three years after moving out, and you no longer meet the two-out-of-five-year use test. The entire gain becomes taxable.
A favorable wrinkle: the period after your last day of personal use does not count as “nonqualified use” when calculating how much gain is excludable.7Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence So if you lived in the home for four years, rented it for two, and sold, you’d still qualify for the exclusion, and none of that rental period would reduce the excludable amount. But any rental period before your period of personal use would count against you.
The practical takeaway: if you might sell, keep the rental period under three years to preserve the exclusion. Every additional year beyond that adds to your eventual tax bill.
Using Rental Income to Buy Your Next Home
If you’re converting the current home because you’re buying a new primary residence, the rental income can help you qualify for the new mortgage — with a haircut. Fannie Mae requires lenders to multiply gross monthly rent by 75% when calculating qualifying rental income, treating the other 25% as vacancy and maintenance. You’ll need a fully executed lease and, typically, copies of the security deposit and first month’s rent along with proof that both checks were deposited.8Fannie Mae. Rental Income
How much of that income actually helps you qualify depends on your situation. If you have property management experience and a current housing expense on the new property, the rental income has no special restrictions.8Fannie Mae. Rental Income Without both, the rental income can only offset the rental property’s own mortgage payment, not boost your overall qualifying income. That distinction can decide whether the new purchase gets approved, so raise it with your loan officer early.
Plan for higher reserves, too. Lenders typically want six to 12 months of mortgage payments in liquid reserves for the rental property, on top of the reserves required for the new home. When savings are thin, reserves are often the bottleneck even when income looks fine on paper.