Cash-out refinancing is common for residential properties but how about investment properties? Could you tap into your rental property’s equity?
The answer is a resounding “yes.” However, it might be more difficult than cashing out on an owner-occupied home.
Understanding the risk
For starters, lenders already consider cash-out refis on property investments risky. You might need to show a good credit standing, and at least 6 months worth of liquid reserves to qualify, on top of other requirements. You also have to show that you possess a significant equity on the investment property in question – typically around 30 to 40 percent. The rules are strict, but getting it done is not impossible.
2017 Cash-Out Refi Guidelines
In 2017, Fannie Mae set up the rules and guidelines for rental property cash-out refinances.
- 75 percent maximum LTV for single-unit properties; 70 percent maximum LTV for four-unit properties. For ARMs, these maximums are lowered by 10 percent.
- 70 percent maximum LTV for properties listed for sale within the last six months
- Property must not be listed for sale during your application
- Property must not be purchased within the past six months. An exemption to this rule can be applied if:
a.) the new loan is not more than the original purchase price and the closing cost combined
b.) the home is not purchased using mortgage financing unless the financing was on another property
c.) the seller’s interest is solely on the sale itself
d.) the owner possesses the HUD1 document from the purchase
Generally speaking, the more equity you have, the more possible it is for you to qualify for an investment home cash-out refi. Aside from this, you must be able to address the following to determine whether cashing out on your rental property is the right move:
Your payment increase. Will your rental income cover the cost? If not, should you increase your rental income as well?
Future investment prospects. Do you plan to obtain another property in the future, possibly with another loan? If such is the case, you must keep in mind that your current loan might affect your eligibility for another loan.
Benefits. Taking out a refinancing will restart your mortgage clock. That is why your reason for cashing out must be reasonable and adequate. If your proceeds from the cash-out will only patch up a short-term problem, you are probably better off looking for another financial resolve.
Terms. Factor your investment goals in determining whether to choose a fixed-rate or an adjustable-rate mortgage on your refinance. Most property investors choose fixed-rate mortgages for the stability. But if you are confident of the market conditions, go ahead and take the risk but see to it that you have a back up plan when the market doesn’t turn out to be what you expected.
The decision to take a cash-out refi on an investment property can be difficult, but experts advise that for your cash-out to be worth it, it should result to either: a) the lowering of your monthly payment; or b) bringing more cash-flow into your pocket.
If you satisfy all the lender qualifications, have outstanding credit, possess significant equity in your property, and after thorough analysis, have determined that the loan could indeed conclude into one of the aforementioned, then you have all the signs to by all means arrange an appointment with a lender today.