Occupancy Clauses

• Some mortgages specifically state that you must be the occupant of the mortgaged home. If your mortgage contract has a clause like this, you absolutely must notify the mortgage lender of your intention to rent. If the mortgage contract is silent about rental, you generally can rent out the property without a problem.
  
  

Rationale

• Mortgage lenders want you to contact them about the rental of your property, and therefore include occupancy clauses in mortgage contracts for three reasons. The first reason is that lenders offer different types of mortgages --- you can get occupancy mortgages for homes in which you intend to reside, and different ones for second homes and investment properties you intend to rent. Each of these types of mortgages is associated with different risk rates, so the interest rate the lender offers to you connects directly to what type of mortgage you have. If you get an occupancy loan and then rent, you are asking the lender to give you an interest rate that isn't connected to the lender's current liability. Additionally, lenders have a financial investment in your home; until the mortgage is completely paid off, they technically own part of it. The lender will want to protect this investment. The only real way the lender can do this is if it has some control over who enters the mortgage property. The mortgage lender must also be able to contact you about your mortgage if necessary. If you rent out the property, the lender will need your new address, even if it is comfortable with you renting the home.
  
  

Insurance

• Insurance companies offer very different policies for homeowners and landlords. If you rent your mortgaged home, you may need to switch policies or providers. Your mortgage lender will want to know what insurance you have, so it can guarantee that its investment in the home is protected in the event of a disaster.
  
  

The Bottom Line

• Whether you legally have to tell your mortgage lender you are renting out your home depends primarily on the terms of your mortgage contract. Review the contract terms before listing ads for the property and converting it for rental. Be clear with the tenants about the conditions of your mortgage, as well; as they could be impacted by a foreclosure, even if they are model renters. Even if your lender does not require it in your contract, it is courteous to alert your mortgage lender to your plans.