You can use a cash out refinance to borrow money from the value of an investment or rental property’s equity just like you can from the value of your home’s equity.
The process is similar for both. You replace the current mortgage on the property with a new mortgage for a higher amount and get the difference in cash at closing. You can use the cash for any purpose although many owners use the money to pay for renovations, help them buy another investment property, or make other business investments.
You’ll need a substantial amount of equity to qualify for a cash out refinance. Lenders typically charge higher interest rates and have higher credit and financial requirements for cash out refinances of investment and rental properties.
What are the benefits of cash out refinances for investment properties?
With home prices rising in many communities across the country, the value of investment and rental houses is rising too. This means you might have more equity in a property that you can tap into for a cash out refinance.
For example, you might use a cash out refinance to make upgrades and improvements to a rental property, which could help you rent the home for money. Renovations can also help increase the value of the property, which might help you sell the house for more money in the future.
You can use the cash to help you buy another investment property or invest in other business opportunities besides real estate. You could use the cash to consolidate debts as well.
What are the costs of cash out refinances for investment properties?
The interest rates for cash out refinances on investment and rental houses can often be higher than those for homes which you live in. That’s because lenders can see these loans as having more risks and charge a higher rate as a result. Lenders often require you to keep a greater amount of equity in the property as well, which can reduce the amount of cash you might be able to borrow against the value of the house.
Like all cash out refinances, you’ll increase the principal balance of your mortgage. The amount of your monthly payment will probably go up and you will likely pay more interest over the life of the loan. There are closing costs you will need pay. Because the loan will be secured by the investment or rental house you are refinancing, you could lose the property if you default on the mortgage. As a result, look at the costs and benefits of refinancing and decide if they make sense for you.
What are the requirements for cash out refinancing of investment and rental properties?
Lenders typically have higher credit, income, and financial requirements for cash out refinances of investment properties compared to homes in which the owners live. Lenders often follow the requirements set by Fannie Mae, which include:
- 6 months of ownership. Most lenders will require at least 6 months of ownership before offering a conventional cash out refinance on an investment or rental property. FHA cash out refinancing often requires at least 12 months of ownership.
- Lower loan-to-value ratios (LTV). For a 1-unit investment or rental property, the maximum LTV is often 75%. For a 2-4 unit property, the maximum LTV is often 70%. Your loan-to-value ratio affects the amount of cash you may be able to borrow from the equity of a property.
- Higher minimum credit scores. For a 1-unit property, the minimum credit score can be between 640 to 680. For a 2-4 unit property, the minimum credit score can be between 680 to 700.
- Minimum cash reserves. Many cash out refinances on investment properties will require you to have between 2 to 12 months of mortgage payments in cash.
To qualify for cash out refinancing, you’ll need a substantial amount of equity in the property. You’ll need to complete an application and provide documents like W2 or 1099 forms, bank statements, investment and retirement account statements, proof of homeowners insurance, and proof of title insurance. Your lender will need to review and approve your application. Finally, you’ll need to review and sign documents, including your closing documents.
Can you get an FHA or VA cash out refinance on an investment property?
No, in most cases, you cannot use an FHA or VA cash out refinance on an investment or rental property. That’s because you need to live in the home you finance with these loans. To get a cash out refinance on an investment property, you’ll most likely need to choose a conventional loan.
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Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only and are not investment or financial advice. Consult a financial advisor before making important financial decisions.
Last reviewed by Freedom Mortgage Corporation, June 2022