How to Refinance Your Investment Property in 5 Steps
Choosing to refinance an investment property can help you improve your cash flow, free up money for new investments or replenish cash you spent fixing up a rental home. Investment property mortgage rates are more costly than primary residence mortgage rates, and qualifying standards are more strict. Following the five steps below may save you time and money if you plan to refinance a rental home.
Step 1: Decide why you want to refinance your investment property
The most common reason to refinance an investment property is to lower your payment so you take home more rental income every month. It can also make sense to pursue a rental property refinance if:
You want to tap equity you’ve built to buy other properties. If home values are on the rise, you may be able to put the extra equity to work to buy more income-producing properties.
You’re shortening the term to pay your mortgage off faster. You’ll build equity faster by refinancing your investment property loan to a 15-year term. The higher payment may even be offset by higher rents.
You need to pay off a hard money loan used to purchase the home. A rental refinance can clear out a high-interest-rate hard money loan used to purchase a fixer-upper property.
You’re replenishing cash used for an “all-cash” purchase. If you tapped a 401(k) or stock account to pay all cash for an investment property, conventional lending guidelines allow you to replenish your money within six months of the purchase.
Step 2: Gather your financial paperwork
In addition to documenting your regular income and checking your credit scores, lenders need extra paperwork specific to the investment property you’re refinancing. Below is a breakdown of what you’ll need and why.
- Current leases on your property. Lenders request the most current lease on the property, as well as rental agreements on any other rental homes you own.
- Two years of tax returns including Schedule E. Lenders calculate your income and expenses on the rental home based on figures from Schedule E of your tax returns. If you just purchased the property, a lease may be acceptable. However, the lender will discount the income by 25% to account for potential maintenance and vacancy expenses.
- Property taxes and homeowners insurance. If your current mortgage doesn’t include property taxes and insurance, have a copy of your tax bill and homeowners insurance policy handy.
- Mortgage statements on the home you’re refinancing. Provide your most current mortgage statement. For hard money loans, you may need to contact the lender directly for a payment history.
- HOA information. Lenders need to calculate any monthly homeowners association (HOA) payments, so gather up your monthly or annual HOA statements.
- Legal description change information. If you’ve split your lot or added an address for a multiunit property, make sure you provide the paperwork to your lender.
- Proof of ownership. If you’ve put the property in an LLC or corporation, you may need to deed it back into your individual name before refinancing.
- Paperwork related to an all-cash purchase. If you withdrew from a retirement account or borrowed against a 401(k), the lender may need proof of the paperwork to complete your refinance.
- Extra asset documentation. Conventional loans require proof of extra cash to cover between 2% and 6% of your total mortgage balances, depending on how many properties you own. Known as “mortgage reserves” in lender language, these funds must be easily converted to cash and documented with at least two months’ worth of current asset statements.
Step 3: Shop for a lender
You’ll find investment property mortgage rates are typically higher than rates on loans for primary homes. It’s not unusual to pay 50 to 87.5 basis points more than you would a primary residence refinance. For example, if current 30-year mortgage rates for primary residences are 5%, you can expect a rate quote between 5.5% and 5.875% for an investment property refinance.
Plan to shop more aggressively — pricing may vary widely from lender to lender. Some lenders offer special pricing for investment loans. Others may offer alternative or non-QM loans — that only require you to prove your rent covers the mortgage payment — but they come with much higher rates than fully vetted mortgage loans.
To get the lowest investment property mortgage rates you’ll need the following:
- A good credit score. The minimum credit score is 620 for a one- to four-unit home, but to get the best rate at the lowest costs, aim for a 740 score or higher. The requirement jumps to between 680 and 720 if you’re buying a multifamily home.
- A good chunk of equity. In most cases, you need at least 25% equity in an investment property. The equity requirement for a cash-out refinance is 30% on a two- to four-unit home.
- A habitable property. Your fixer-upper will need to be repaired and move-in ready to get an investment property refinance loan.
- A maximum of 10 properties. Investors can have up to 10 financed one- to four-unit residential properties, including their main home. Make sure you have enough cash to cover the reserve requirement, which can be as high as 6% of your total mortgage balances if you own seven or more properties.
Step 4: Plan for the appraisal
You’ll spend several hundred dollars extra for a home appraisal on a rental property. Lenders require an additional analysis of your property’s rental income compared to other properties in the area, as well as a look at how much it costs to operate the home.
Schedule the inspection with your tenants and let them know why you’re having the home appraised (they may be nervous you’re going to sell the home and start looking to rent elsewhere). Have a copy of the current lease handy, and if the property was recently renovated, provide receipts with a list of improvements to the appraiser so you get credit for all the upgrades you’ve made since the home was purchased.
Step 5: Prepare for closing
While you may pay 2% to 6% of your loan toward closing costs on a primary residence refinance, you may be presented with higher discount points if you have a lower credit score. Keep in mind that the extra points don’t necessarily lead to a lower rate — they are meant to pay the lender upfront for the added risk you might default on an investment property versus a primary residence.
Be sure the figures on your closing disclosure are correct. There is no three-day right of rescission on an investment property refinance, so you’ll need to be sure you want the loan before you’ve signed the closing papers.
Extra requirements to refinance an investment property
To reduce the risk that you might default on an investment refinance loan, lenders may require some or all of the following conditions to approve your rental home refinance:
Proof of landlord experience. You’ll typically need to prove you’ve managed rental homes for at least the past year if you want to use the income on the property you’re refinancing to help you qualify.
Mortgage reserves. The chart below provides you with how many months’ worth of mortgage reserves you’ll need to verify to get approved based on the number of financed properties you own:
|Number of financed properties owned
|Percentage of unpaid mortgage balances required for reserves
|One to four
|Five to six
|Seven to 10
Lower LTV ratio limits. For a single-family investment property refinance, you won’t be able to borrow more than 75% of your home’s value. This is also known as your loan-to-value (LTV) ratio.
Investment property refinances for FHA and VA loans. Loans backed by the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) are typically only for primary residences. However, if you’ve converted a home with an FHA or VA loan to a primary residence that you’ve lived in for at least 12 months, you may be able to refinance using the FHA streamline or VA interest rate reduction refinance loan (IRRRL) program. An added bonus: No appraisal or income documentation are required.