Is it illegal to rent basement?

Question

Hello BP community!

I have a big question. Here’s the background: my partner and I have a realtor that sent us to a loan officer for us to talk to him about the best way to do our 2018 taxes to have the best chances at a great loan. Now we talked to the guy and he ran our credit and is in the process of getting us pre-approved (not what we initially wanted at the stage but ok) and we told him that we wanted to rent out the basement of our house and he said that was illegal for an FHA loan. We are looking for something in Maryland. Is that true? He is also saying that 203k loans aren’t the way to go and that only one of us should be on the loan. I don’t want to do anything illegal but how do people rent out rooms/basements and it being ok with the lender and everyone else? Any help is great!

Warm wishes,

Ana Coello

Russell Brazil · Answer

Depends on the jurisdiction. PG County you can not rent out the basement.  DC you can if it is owner occupant and it meets certain condition requirements. Montgomery County you can if it is owner occupied, meets certain condition requirements, and is more than 500 feet away from another basement rental.  The ability to rent out the basement though has nothing to do with your lending/borrowing situation.

And a 203k loan is largely not going to be something you can actually use in most cases in our current market. If the property is in bad enough condition it needs rehab...someone is buying it with all cash.  Properties priced appropriately move briskly...and a 203k loan has a very long closing timeline, that often falls apart, so no listing agent is going to accept a contract with one if the property is already appropriately priced.

Stephanie Medellin · Answer

@Ana Coello  The advice so far has been spot on.  Renting out the basement will depend on the local municipality and whether the basement meets code requirements as a living space.

As far as renting being illegal with the FHA loan, he may have been referring to a form you'll need to sign saying you won't rent the property out for short term rentals.  If this is the case and you were thinking AirBNB for the basement, you actually have to sign a form at closing stating that the property won't be used for hotel or transient use, with no rentals less than 30 days.  https://www.hud.gov/sites/documents/92561.PDF

Maybe with 203(k) it's hard to get offers accepted in your market.  One selling point of an offer with a 203(k) loan is a higher offer price.  You may be willing to pay a higher price than a cash buyer in exchange for the seller working with you.  I'm sure there are sellers out there who would gladly take a higher price, even if it means waiting a little longer for closing if you're a serious buyer and well qualified.

The loan officer is recommending only one person be on the new loan.  Does one of the applicants have poor credit, or a much lower score than the other applicant?  Does one person have significantly more debt with not that much income?  The approval will be based on the person with the lower score, so your interest rate, and even the max DTI that you can qualify for will be based on guidelines for the lowest middle score.  Might not be impossible, but terms may be much less favorable depending on the circumstances.

Christopher Phillips · Answer

@Ana Coello

As was mentioned, most municipalities don't allow them because of the safety hazard. They also don't like home apartments because they increase congestion in the area and are a potential burden on school enrollment.

Those that do allow basement apartments make you jump through a lot of hoops. One, it would need two means of egress in case of an emergency. Either a separate outside entrance or an egress window. It can't just be going up the stairs to get out of a fire. In both cases, you're looking a lot of money for installation. The property will likely need inspections. Some will make you get a landlord permit. Some will make you increase the size of the driveway to accommodate parking for the tenant. Every area is a little different.

If you want rental income, buy a legal multifamily home by or a home with a permitted accessory apartment.

Your lender is correct in the sense that you can't tell the bank you're going to illegally rent out the basement and have them include the rental income in your application.

Is it illegal to rent basement?

Most Popular Reply