Pay Your Mortgage by Renting a Room - TheStreet

OK, times are tough — so tough that you might be considering taking on a boarder to meet your monthly mortgage.

If so, you’re hardly alone. According to RealtyTrac, 2009 punched out with a record number of 3.96 million foreclosure filings (including default notices, scheduled auctions and bank repossessions). With tens of millions more homeowners late on their mortgages, and another 7 million who have lost their jobs in the last year alone, there’s a huge appetite among U.S. homeowners to do whatever it takes to make their mortgage payments and keep their homes.

Increasingly, that includes renting out a room in their home. If you decide to go that route, you’d be doing yourself a big favor by planning things out in advance. After all, renting a room to a stranger pretty much defines the meaning of the word "risk." It may very well pay off, but the chances of the process going well depend largely on the due diligence you expend before anyone exchanges house keys.

Do you really need to rent that room? Certainly, at any given time, things may look bleak. If you lost your job, or face a mortgage rate hike on your adjustable-rate loan, paying your monthly mortgage isn’t a sure thing. But try to take a longer view before you rent a room. If you’re confident of finding another job, can lean on savings, or, in the case of an ARM loan, you can refinance your loan, these are all better options of signing a rental room lease of one year or more. If you've taken all of these options under advisement and still want to rent a room, here are a few tips to take with you during the process:

Check the legality. Your neighborhood, subdivision or condominium complex may have rules against homeowners renting out rooms to tenants. Check with your tenant association or neighborhood association to see if there are any occupancy rules or bylaws that come into play when you rent a room. If you live in a single standing home, you should have no problem.

Keep it functional. Your rental room ideally should have a separate entrance, along with a separate bathroom and/or kitchen area. That’s not feasible in most U.S. homes, so you might have to renovate a basement area to accommodate your tenant’s needs — and that could cost you thousands of dollars in contracting costs.

Make sure your insurance is on board. Check with your insurance company before renting out a room. More people in your home means more risk — and insurance companies write homeowner policies specifically based on risk. If there is a provision in your policy that prohibits renting out rooms in your home, and you don’t tell your insurer that you’re doing so, you run the risk of having your homeowner insurance canceled.

Factor in utilities. Again, more people in your home also means higher electricity, water and heating costs. Factor higher utilities in before you decide on a rent amount. For a good home utility calculator, visit this site.

Get your taxes organized. The IRS has specific rules on declaring rental income on your taxes. Make sure to declare all rental income on your forms. If not, big tax penalties may kick in down the road. Check out the IRS Web site for more information.

Run a credit check. To mitigate potential problems, run a credit check on all rental applicants. Running a criminal background check is a good idea, too. Start at

Renting a room is usually a last resort for homeowners. If you have to go down that road, do your homework first, rent to someone you know and make sure both you and your tenant have an easy out if things get problematic.

Your home — and your safety and sanity — may depend on it.

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