You often hear about cash out refinancing for homes that are the primary residences of the borrowers, but cash out refinancing is making a comeback for investment properties, too. While they were hard to come by just a few years ago, many lenders now offer investment property owners the chance to cash in on their non-owner occupied homes’ equity.
If you’re someone who generates income from rental properties, then a cash out refinance could be a great strategy for you. Cash out refinancing could help you grow your rental income, for instance, if the cash is to improve the property. Many cash out refinance applicants lower their rate while taking cash out, improving their positive cash flow.
Here’s what you need to know about the cash out refinance rules as they apply to investment properties, and if you’re a good candidate to go for it…
Do you have equity in your rental property?
As with most cash out refinancing programs, the more equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan. For a non-owner occupied refinance, most lenders will loan up to 75 percent of the appraised value of the home, the maximum set by Fannie Mae. In rare instances, you could find lenders that will go up to 80 percent, but these are probably the bank’s proprietary loan programs for which they charge a higher rate.
In other words, in order to make a cash out refinance worth your while, you need to be in good shape equity-wise before you get started. Rental properties with 30 to 40 percent equity are the best candidates for cash out. Owners who purchased years ago might even drop their rate while taking cash out.
2016 Non-Owner Occupied Cash Out Refinance Rules
Here are some recent rules and guidelines for cash out refinances on rental properties as set by Fannie Mae:
- The maximum loan-to-value is 75% for 1-unit properties and 70% for 2- to 4-unit properties. These maximums are lowered by 10% for adjustable rate mortgages.
- If the property was listed for sale in the last six months, the maximum LTV is 70%.
- The property must not be listed for sale at the time of loan application.
- The property is not eligible for a cash out refinance if it was purchased within the last six months. There is an exception for properties that meet the Delayed Financing guidelines.
Delayed Financing Rule: A rental property that was purchased within the last six months is eligible for a cash out refinance if:
- The new loan amount is no more than the original purchase price plus closing costs.
- No mortgage financing was used for the purchase, unless the financing was on another property.
- The transaction was arms-length, meaning the seller did not have a pre-existing relationship nor a financial interest in the sale besides the sale itself.
- The buyer has a HUD1 (final settlement statement) showing the purchase price and other details of the transaction.
Non-owner occupied cash out refinancing is best for above-average borrowers
Cash out loans are risky business for lenders, especially in the case of those who are not living in the homes they are refinancing. That’s why qualifications are rigorous, and you can expect more paperwork than you would from an owner-occupied or no cash out refinance.
For example, candidates must have a great credit scores and 6 months’ worth of assets to handle the mortgage on their rental and primary residences.
Applicants will also have to present tax information, rental lease agreements, and other property income information. Finally, if you already have more than four financed properties, some lenders may not accept your loan.
Is cash out refinancing right for your investment property?
If you think you have ample equity, meet borrower requirements, and will benefit from a drop in interest rate, there are just a few more things to consider before you move forward with a cash out refinancing.
For starters, work out how much your payment will increase, if any, by adding principal to your loan balance. Will your rental income be able to cover the increase?
Also consider whether you will purchase more rental properties. Taking on additional debt could have an effect on your eligibility for future loans.
Also, because it will take time to see an income return on your refinancing, be sure that your cash out loan will help you in the long run, not just to have some cash in the short term.
You also need to carefully go over the terms of the loan to be sure it makes sense for your investment goals. Different lenders will have varied loan terms for non-owner occupied refinances, including adjustable rate mortgages versus fixed rate. If you opt for an adjustable rate mortgage, you have to be very confident that you will be able to handle fluctuations that may arise. This is why most investment property owners choose a fixed rate.
Where to apply for a rental property cash out refinance
Once you factor all of the above into your decision, you may find that a cash out refinance on your investment property can help you buy more rental homes or make improvements on existing properties.
The key with this option – as with any refinancing – is to either lower your monthly payments right away, or put more cash flow into your pocket over time. If a non-owner occupied cash out refinance has one of those outcomes, then you should speak with a lender who specializes in these loans.
Most of today’s lenders offer cash out refinances on rental properties at similar terms. You can get started on your application now by completing a short online form here. The lender can pre-qualify you and give you a rate and payment quote, which is the first step to making sure this type of refinance is the right move.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a licensed loan officer with over 12 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.