How to Refinance a Rental
Many people run into difficulties when trying to refinance rental properties because banks have very strict underwriting guidelines for rental income property mortgages. Most banks require borrowers to have between 20 and 50 percent equity in a rental home when refinancing. Banks cannot acquire mortgage insurance that protects them from borrower default on rental properties and investors typically do not want to buy mortgages that do not have mortgage insurance. Rental home mortgages, where available, have high interest rates because they represent a greater level of risk for lenders and investors than mortgages on primary residences.
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Instructions
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Go online to Lendingtree.com, Bankrate.com and the websites of lenders in your area to see what options are available for rental income property mortgages. Banks frequently change the lending guidelines depending on the supply and demand of mortgage sales on the secondary market. You often find a bank that refused to refinance rental homes one month suddenly begins to offer rental loans during the next month. Check bank websites for the most up to date information. Compile a list of prospective lenders.
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Contact your current mortgage holder. Ask your lender what terms they can offer you for a rental home refinance. Contact the other lenders and compare the terms available to you. If you have a mortgage that exceeds the value of your home, you cannot refinance it. Your current lender may offer to refinance a loan at a higher loan-to-value ratio than a competitor because your current lender has a vested interest in making sure you can afford monthly payments.
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Decide which lender to work with and provide a loan officer with your last two years of tax returns, last two W2's, two most recent paystubs and a valid ID. You must also provide a copy of your homeowners insurance declaration page for the rental home, the warranty deed and the most recent mortgage statement. Most banks only allow you to refinance the existing loan amount rather than extract additional cash. You must also provide the bank with evidence of your primary home in the form of a tax assessment to show that you do not reside at the rental home. The bank assesses your application using your documents and your credit report.
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Close the loan. Sign the refinance documents at the lender or title company office. The lender pays off your old mortgage the day of the closing. You must begin making payments on the new loan within 45 days of the loan closing.
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Tips & Warnings
Keep rental agreements and bank statements showing your renters' monthly payments on file for at least two years. Some banks allow you to include rental income, in full or in part, in your debt-to-income ratio when applying for a loan.
Generally, interest rates on loans for rental homes are at least 1 percent higher than loans secured by primary residences. You can opt to refinance into a variable rate loan, but make sure you understand how the variable rates work. Many variable rate mortgages have terms that enable rates to rise as high as 20 percent.
