How to Rent Your House to Avoid Foreclosure


How to Rent Your House to Avoid Foreclosure

Losing your home to foreclosure can be devastating. But renting out your property can provide income to help you get caught up on mortgage payments and avoid foreclosure. This guide covers everything you need to know about renting your house to avoid foreclosure.

Contact Your Lender

The first step is to contact your lender as soon as you realize you may have trouble making mortgage payments. Lenders want to help borrowers avoid foreclosure, so they may offer options like:

  • Forbearance – Temporarily reduced or suspended payments
  • Repayment plan – Pay back missed payments over time
  • Loan modification – Permanently change loan terms like interest rate or length

Don’t wait until you’ve missed multiple payments. The sooner you ask for help, the more options your lender may provide. Be prepared to explain your financial situation and hardship[4].

Work with a HUD Counselor

HUD-approved housing counselors provide free foreclosure prevention help. They can assess your situation, explain options, and negotiate with your lender. Locate a counselor through the HUD website or call 800-569-4287[1][4].

Counselors have relationships with lenders and can advocate for programs and solutions. Their guidance can help you avoid mistakes that make your situation worse.

Refinance or Modify Your Loan

If your financial hardship is temporary, refinancing your mortgage may help. You may qualify for a lower interest rate to reduce payments. Or you could extend the repayment term to lower monthly costs[5].

Your lender may also agree to modify your existing loan. For example, they could reduce the interest rate for a set period of time. Or allow you to pay only interest or part of the principal for a while.

Loan modifications directly impact your current mortgage. Refinancing involves getting a new loan to replace the old one. Work with your lender or counselor to determine if these options fit your situation.

Rent Out Part of Your Home

Renting out a portion of your house provides rental income you can use toward the mortgage. For example, you could lease out a basement apartment or detached guest house. Screen tenants thoroughly and consult an attorney to ensure you comply with laws and regulations for your area[5].

Renting part of your home may violate your mortgage agreement if you don’t get approval. Check with your lender before listing any portion of the property for rent. Temporary subletting may be allowed in some cases.

Lease the Entire House

If your financial issues require an extended absence or move, leasing the entire property can generate larger rental proceeds. Estimate costs like maintenance and repairs. Will the rent provide enough income to cover the mortgage and other ownership expenses?

Review your mortgage agreement for clauses about renting out the property. Most lenders prohibit renting within the first 12 months of ownership. And some mortgages only allow renting for a limited time, like 12 or 24 months[5].

Get written permission from your lender before listing your house for rent. Explain why you need to rent it and how it will help you avoid foreclosure. Discuss any objections and be prepared to negotiate requirements or restrictions.

Find a Great Tenant

The key to success is finding a responsible tenant who pays on time and cares for the property. Start your search by asking friends, family, neighbors, coworkers, etc. if they know anyone looking to rent.

Also post ads online and in local papers. Include details like size, amenities, school district, and rental price range. Require interested prospects to complete a rental application that includes[5]:

  • Full name, date of birth, contact info
  • Social Security number for credit and background checks
  • Current and previous home addresses
  • Employer names and income
  • Personal and professional references

Call references and employers to verify details. Meet applicants in person and give them a tour. Go with your gut instinct and don’t rent to anyone that makes you uncomfortable.

Run a credit check and criminal background check. Set minimum credit score and income requirements. Require 1-2 months’ rent for the security deposit.

Have an attorney review the lease agreement to ensure it protects your interests. Outline rules, rental term, payment method and timeline, security deposit, maintenance expectations, and more.

Make Repairs and Improvements

To attract top renters and earn maximum income, make any needed repairs and prepare the property to rent:

  • Fix leaky faucets, damaged floors, peeling paint, etc.
  • Clean thoroughly and declutter
  • Paint walls with neutral colors
  • Stage rooms like a model home
  • Upgrade old light fixtures and hardware
  • Landscape the yard and refresh exterior

Also replace worn carpeting and update outdated kitchens or bathrooms if possible. These improvements help justify higher rent that provides more income.

Pay Other Bills First

Once you start collecting rent, pay essential bills like property taxes, insurance, utilities, and HOA fees before the mortgage[4]. Not paying these other bills can cause additional financial issues.

If the rental income doesn’t cover all bills, keep making these priority payments. Then pay as much as possible toward the mortgage payment. Partial payments show the lender you’re acting in good faith.

Build Savings

When the rental income exceeds your monthly costs, build an emergency fund with the extra money. Saving helps you get through periods with no rent, major repairs, or other unplanned expenses.

Aim to save enough to cover 3-6 months of mortgage payments. This provides a financial cushion so you can continue paying the mortgage if you lose a tenant.

Have a Move-In/Move-Out Checklist

Create a detailed checklist to protect your investment:

When tenant moves in:

  • Record meter readings
  • Note condition of walls, floors, appliances, etc.
  • Test smoke detectors and carbon monoxide detectors
  • Hand over keys and garage door openers

When tenant moves out:

  • Provide proper notice according to laws
  • Conduct thorough walk through
  • Record meter readings
  • List damages for tenant to repair
  • Return keys and openers
  • Refund security deposit per laws

Following this checklist helps avoid disputes over property condition and deductions from the security deposit.

Inspect Regularly

Drive by the property periodically to check on it. Look for signs of damage or unauthorized occupants.

Also do occasional walk-throughs inside the home. Provide proper notice before entering. Tenants have a right to privacy, so inspect respectfully and briefly.

Monitoring the property helps avoid surprises and shows tenants you care about maintenance. It also alerts you to any lease violations you need to address.

Have a Local Property Manager

If you’ve moved out of the area, arrange for a local property manager to oversee things like[4]:

  • Collecting rent payments
  • Handling maintenance issues
  • Responding to emergencies
  • Addressing complaints
  • Enforcing lease terms

Property managers have experience screening tenants, documenting condition, handling disputes, and following landlord-tenant laws. Their services provide peace of mind with an absentee rental.

Consider Selling Instead

If your financial struggles won’t improve in the near future, selling the home may be wiser than renting it out temporarily. Home values in many markets are high. You may be able to sell the house for more than you owe and avoid foreclosure.

Consult a real estate agent to discuss listing your house. Ask about strategies to sell it quickly, like pricing it competitively and offering incentives.

Selling relieves you of mortgage payments and maintenance responsibilities. And it allows you to make a fresh start. Carefully consider all your options before deciding to rent your property.

Get Legal and Tax Advice

Consult professionals to protect your interests and avoid costly mistakes:

Attorney – Review lease terms, tenant screening procedures, rental laws, property manager agreements, etc.

Accountant – Understand tax implications of renting your property. Rental income, expenses, depreciation, and capital gains can impact your taxes.

Insurance Agent<//b> – Adjust your homeowners insurance policy to provide liability protection. Rental properties need coverage for risks like tenant injuries, damage to furnishings, or lawsuits. Make sure you have adequate coverage limits[1].

Keep Detailed Records

Having organized records makes tax time easier and helps you operate your rental property like a business:

  • Keep a separate bank account for rental income and expenses
  • Save receipts for purchases and repairs
  • Track mileage for allowable travel
  • Document hours spent on maintenance and management

Use accounting software or spreadsheets to classify and total income and expenses. This streamlines preparing your Schedule E for reporting rental activity[2].

Consult a Tax Professional

A tax advisor can help maximize your rental deductions and avoid mistakes. They guide you on tracking income and expenses, depreciation options, and how to handle the sale of your property[3].

An accountant also reminds you of important deadlines for quarterly estimated payments and year-end filing. Their expertise saves you money and headaches at tax time.

Explore Financing Options

If refinancing or modifying your current mortgage isn’t possible, a new loan may provide needed cash flow:

  • Home equity loan – Uses your home’s equity as collateral
  • Home equity line of credit (HELOC) – Revolving credit based on equity
  • Cash-out refinance – Refinances for more than what you owe

These options allow you to tap equity to get through a temporary hardship. Compare terms and costs to find an affordable financing solution[4].

Review Insurance Needs

Meet with your insurance agent to adjust coverages for renting your home:

  • Increase liability protection in case a tenant gets injured
  • Add loss of rents coverage if property is uninhabitable
  • Get landlord insurance for contents and damages

Proper insurance transfers risks away from you. It covers costs that could otherwise prevent you from paying the mortgage[5].

Renting out your house involves many tax, legal, and financial factors. But with the right preparation and guidance, it can generate income to avoid foreclosure. Consult experts and manage the process diligently to protect your investment.

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