Is it possible to refinance a property if you don’t live in it?
But even with mortgage rates as low as they are, for some people, “it just doesn’t make sense” for them to refinance a rental property, or they are being told they can’t refinance an investment property.
How can this be?
In today’s mortgage market, quite a few home loan programs for investment properties are available through Fannie Mae or Freddie Mac — but there are still portfolio lenders offering investment property programs that Fannie Mae and Freddie Mac don’t offer.
For those people who have recently heard that it wasn’t possible to refinance their investment property, it is likely that they were given one of two common reasons:
- Your loan-to-value (LTV) ratio is too high
- Your current interest rate is low enough that it doesn’t make sense.
Are these the only reasons that someone would be unable to refinance their rental property?
Of course not — but they are the two most common reasons.
Your loan-to-value is too high
For investment properties, generally speaking, lenders will allow you to go up to a 75% loan-to-value. This means that if your investment property is worth $200,000 the most that your loan can be for is $150,000.
If you own an investment property that is worth $200,000 and you owe more than $150,000 on the mortgage currently, most lenders will tell you that you are not eligible for a refinance due to LTV restrictions.
LTV restrictions are different by loan program, but generally speaking you should expect to be required to have significantly more equity in an investment property than you would a primary residence.
Your current interest rate is too low
Lenders have determined that loans made to investors for investment properties are riskier than loans to homeowners who live in the home as their primary residence. As such, lenders will have a different rate for investment properties — a higher one — than they will for primary residences.
Expect a rental property mortgage to generally have a higher interest rate and require having more equity.
Generally speaking, you can expect a lender to have a higher interest rate for investment property loan programs than for primary residence loan programs. How much higher? A good estimate is 0.5 percent higher.
Other items you may need to refinance an investment property
There are more than just a few things that may be required by a lender when refinancing an investment property that are different than what may be required when refinancing a primary residence. Here are a few of the items I have seen lenders require that is different than what is required for refinancing a primary residence:
- Generally speaking, the minimum credit score for up to 5 investment properties is usually 620. For 5-10 properties, the credit score requirement is higher than 620 (720 at one lender).
- The appraisal will generally cost more (usually at least $150 more).
- If you have other investment properties, usually the lender will not allow you to count the rents from those income properties unless you can document the previous two years.
- Reserve requirements are going to be higher – generally speaking, lenders will require that you have 6 months of monthly payments in the bank.
Is it possible to refinance an investment property in today’s mortgage market?
But there are far more reasons that you may hear “it isn’t possible,” than just the two most common ones I just listed.
Justin McHood works for Academy Mortgage and is based in Chandler, AZ. He is a contributor to Zillow Blog and has conversations about mortgages whenever he can. Learn more about Justin at http://www.mortgagecommentator.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.