There are many reasons that people own second properties. Some want a luxurious vacation home, while others want a property that’s close to work. Others want to use a second home as a rental property, turning it from an inactive investment into a monthly cash maker.
But can you rent out a second home? It would be nice, at least from the owner’s perspective, if all properties in all locations could be rented out to long- or short-term tenants. But this is not the case.
Typically, there are two barriers to renting a second home:
- Regulations, such as HOA, neighborhood, city, or county rules, limiting rental properties.
- Loan restrictions that keep you from renting a second home.
While we can’t do anything about the first (you’ll have to take that up with your HOA, city council, or county supervisor), we can help you understand, and possibly get around, the second.
Fannie Mae, for example, is one of the largest organizations in the mortgage and real estate industry. Many people are impacted by Fannie Mae’s rules (which are rooted in government regulations) because this organization impacts so many mortgages. This includes traditional homeowners, as well as owners of second homes.
Fannie Mae supports loans for second homes, but these loans often come with restrictions, rules, and limits. Included in this are rules about how and when you can rent out a second home that is under a loan supported by Fannie Mae.
Fannie Mae’s “Second Home Rider:” The Key to Renting out a Second Home
For a long time, there was a bit of confusion about Fannie Mae’s second home guidelines. The wording was unclear and confusing. Of course, government groups are rarely concise with their language, but the descriptions regarding second home rules were, to be honest, particularly bad.
A few years back, Fannie Mae decided it needed to reword a document called the “Second Home Rider.”
A “rider” is simply an addition or appendix to a mortgage document. (It “rides” along, so to speak.) Its main purpose is to add unique terms and conditions that may not be found in the primary document. Most mortgage documents are fairly standard, so if there are special details, such as a second home, a rider may be attached.
Fannie Mae’s Second Home Rider is essentially a document that describes the terms and conditions of using a Fannie Mae-backed loan to purchase a second home.
While they did not change the rules involved in renting out a second home, they did make changes to how those rules were written, providing greater clarity to borrowers and lending professionals alike.
Before the rules were rewritten, most people assumed that you could not rent out a home that is under a Fannie Mae loan. Even after the rewrite, some people still cling to the thought that Fannie Mae homes cannot be rented out under any circumstance.
This is not at all the case. While there are still rules and limits, you should know that it is entirely possible to rent out your second home even it if has a Fannie Mae loan.
What are the Rules for Renting Out a Second Home
The rules are, at least for a government document, fairly clear. Some specific situations and timelines dictate how and when you can rent out your second property.
First Year: Short-Term Rentals Only, Then Rentals Allowed
If you purchase a second home with a Fannie Mae loan, the first year of ownership is limited to short-term rentals only. According to the second home rider, you must “keep the property available primarily as a residence for (your) personal use and enjoyment for at least one year.” However, the language does state that it is okay to use the property as a short-term rental, as long as it is only rented out for less than half the year. The other half must be dedicated to “personal use.”
Once that first year is complete, however, you are free to rent out the property as you wish. You read that correctly: after one year, you can turn the second home into a full-time rental space. Whether you maintain it as a short-term rental, like the kind found on “AirBnB,” or whether you decide to bring in a year-round renter is entirely up to you.
Renting Out a Second Home? Restrictions Still Remain
Although you are free to rent out the property, there are still a variety of restrictions that remain. One of the most significant is that when renting your second home, you cannot use a property management company. Essentially, if you decide to rent your second home, you will have to maintain responsibility for upkeep and management of the property.
This is an impactful requirement, and the reasoning is a bit unclear. It seems possible that by prohibiting management companies, Fannie Mae is trying to keep investors with numerous properties (who are more likely to use management companies) from using Fannie Mae loans, which are not intended for investment purchases.
Timeshares are also not allowed. You can’t use the Fannie Mae loan to purchase a timeshare-connected property, and you can’t enter a property already purchased with a Fannie Mae loan into a timeshare.
So Why Use a Fannie Mae Loan?
With all these restrictions, rules, and regulations, why use a Fannie Mae loan at all? Why not skip the one-year wait, avoid the restrictions, and simply purchase the property with an investment loan.
To be honest, you could; there are some excellent investment-property loans that help buyers create a world-class portfolio.
But Fannie Mae loans tend to be more user-friendly. They often (but not always) have lower interest rates and easier qualifications standards, especially for typical homeowners who may not be interested in creating a property empire, but just want to purchase a nice little cash-generating property, something that brings a little boost to the monthly budget but also grows in value.
If you’re interested in purchasing a second home, one that will eventually be used as a rental property, contact our team today. We’ll walk you through all the available options so you can decide which loan is right for your next purchase.
