Refinance A Rental Property, and Get That Cash

As a rental property owner, you can tap into your rising equity. As we all know, home prices are up. In fact, in some areas of Colorado, they are way up. According to the Federal Housing Finance Agency experts, values have climbed over 30% nationwide over the last decade.

That sort of equity increase can allow smart real estate investors to refinance rental properties to cash out and pull equity so they can pursue other ventures.

  • For example, investors are continually looking to buy more rental properties. However, there may be a need for cash to improve a rental property, pay off some other loans, or to reduce their private debt.

Mortgage rates are sitting at about half of their historical norm, making right now a perfect time for rental property owners to borrow against their properties and put their equity to work.

Rental property investors can capitalize on their equity with a rental property refinance. They can do this by utilizing their rental properties equity, and not just leaving it on the sideline.

Poorly utilized equity in a rental may look good on paper, which is acceptable for investors not looking to grow their portfolio. If an investor has plenty of cash, then there is no need to pull equity. However, if you refinance a rental property loan, you can put the equity value to work.

Reasons to Cash-Out Refinance Your Rental Property

Rental Property Renovations

Rental property renovations can increase your rental properties value and allow for higher rent. Your tenants will also be more inclined to stay in your property longer. 

Increase Your Real Estate Portfolio

We believe the best reason to refinance your rental property and to pull cash is to increase your real estate portfolio. As an example, say you have a rental property worth $450,000 with a loan of $150,000. You can quickly get a cash-out loan of up to 70% to 75% of the current value, allowing you to pull around $187,000 out of your equity. Now you can put 20% down on another rental property or even a few. Therefore, as you can see, a cash-out investment property loan is a great tool to help you build your real estate portfolio and increase your rental income.

Conventional Non-Owner Occupied Cash-Out Loan Programs

As of the time of this writing, besides private lending options, only conventional loans can be used for cashing out equity in an investment property. 

Of the many loan agencies, Fannie Mae and Freddie Mac set rules that conventional mortgage lenders are required to follow. The good news is that they have opened up the guidelines somewhat for cash-out refinance opportunities for highly qualified landlords and investors.

Note: Abbey Mortgage is a Private Lender and does not offer Fannie Mae or Freddie Mac Conventional loans. Therefore, the following details in this article are intended to be informational. We want you to be informed so you are aware of all of your options when looking at investment property financing or refinance. We are here to help when conventional loan options fail.

Maximum LTV For Investment Property Cash-Out Refi for 2020

We all saw many investors and homeowners whose property values were underwater 15 years ago, but properties today have substantial equity. Equity is critical for getting approved for a conventional rental property cash-out refinance.

Lenders typically adhere to loan-to-value (LTV) rules, as set by Fannie Mae and Freddie Mac. Freddie Mac is a little laxer than Fannie Mae, especially when the investor is seeking an adjustable-rate mortgage (ARM). 

The table below shows both Freddie Mac’s and Fannie Mae’s typical LTV limits for cash-out, as well as no-cash out refinances.

Fannie Mae Units Fixed Rate ARM

No-Cash Refinance 1-4 unit 75% LTV 65% LTV

Cash-Out Refinance 1-unit 75% LTV 65% LTV

 2-4 unit 70% LTV 60% LTV

Freddie Mac Units Fixed Rate ARM

No-Cash Refinance 1-unit 85% LTV 85% LTV

 2-4 unit 75% LTV 75% LTV

Cash-Out Refinance 1-unit 75% LTV 75% LTV

 2-4 unit 70% LTV 70% LTV

Properties currently listed must be off the market for six months or are limited to an LTV of 70% for a cash-out refi. However, normal LTV rates are available after the six month waiting period is up.

The bottom line is that if you are close regarding LTV, you should use a Freddie Mac lender, especially when looking for an ARM rate.

You should do your research because there are lenders that only approve Fannie Mae loans, some favor Freddie Mac requirements, and some will do both. By shopping around, you will find the right mortgage lender for your situation.

More on Investment Property Cash-Out Waiting Periods

Although we have a hot real estate market, there are still deals out there. Real estate investors are always buying properties to fix up and then, later on, pull the equity with a cash-out refinance. Doing this is allowed, but the waiting period will apply, and six months will need to pass from the sale of the property and funding of a cash-out mortgage.

  • There are a few exceptions, such as when the property is inherited, is awarded through a divorce or separation order, or it qualifies for the delayed financing exception. Delayed financing comes into play when you buy a property with cash, then reimbursing yourself with a refinance.

Immediate Cash-Out Via Fannie Mae’s Delayed Financing Rule

This one is relatively simple to understand; there are no loans on a cash purchased property. This technically makes any loan on an investment property a cash-out refinance. A rental property buyer would have to wait the six months before they can pull out their invested cash per the standard rules. That can tie up a ton of money for a long time, which is not ideal if an investor wants to put their money back into the market.

In 2011, Fannie Mae released the delayed finance exception. Home investors are now eligible to receive a cash-out refinance right after closing on their cash purchase. As with all governmental loan policies, there are guidelines for delayed financing. The buyer must not have used proceeds from a loan to purchase the property. The buyer must be able to document the source of funds used to buy the property. There can be no liens open, and a title search is required to confirm there is no lien or other financings.

If you have plans to use the delayed finance exception, you should keep good records. The HUD-1 closing document will have many of the facts that your Freddie Mac lender will require because it includes all closing fees and any loans that are on the property.

FICO Scores and Cash Reserves

Investment property cash-out loans are viewed by lenders differently than residential homeowner loans. For starters, the lenders’ underwriting review will be much more stringent. Non-owner-occupied and cash-out features are considered to be a higher risk, which is supported by statistics.

FICO scores will likely need to be over 680; however, Fannie Mae criteria may allow for some approvals for credit scores as low as 620 if the loan is accepted and approved through the DU computerized underwriting system.

What this means is that having a low credit score is not an immediate no. However, you will need to shop around for an aggressive lender as there will be lenders with lower standards than others.

Cash reserves are often a sticking point for investors. An investor must have adequate cash reserves, which cannot include cash from the cash-out loan proceeds. Reserve minimums are calculated based on the payment for the property. Investors should expect up to twelve months of the investment property payment in a verified account.

The lender may also require between two percent and six percent of unpaid loan balances on other properties, including an investor’s primary residence.

Sometimes Private Loans are Your Best Alternative For Cash-Out Refinancing

Investors should keep in mind that there are lenders offering loans other than those offered by Fannie and Freddie lenders. Abbey Mortgage is one of these lenders, and we have created custom loan programs based on investment based policies that weigh the risk and strength of the deal. 

We are much more lenient regarding credit score because we are more interested in equity and the overall deal. If your scenario does not check off all of the Fannie/Freddie boxes, we can probably help you get the money you are needing. 

One other consideration is the time and money it takes to close. As you look into conventional cash-out refinance options, you’ll soon discover there are some high closing costs, and closing will take around 45 days.

On the other hand, a private loan comes with a few advantages:

  • We can fund cash-out loans in a week in some cases, and most deals fund in two weeks or less.
  • Although three will be costs, you may be able to skip some costs like escrow and appraisal fees.

If you need cash and you are either not able to get approved, or it will take too long, we can help. Private loans can be cheaper in the long run. Despite higher rates, we can get your deal done fast. After all, you can refinance out of this loan later when you do meet conventional loan requirements. 

Interest Rates for Investment Properties is at an All-Time Low

We all know that the current mortgage interest rates are low. This market is presenting a limited opportunity to build your real estate portfolio while capitalizing on low-interest rates. So, check around on your loan options and rental property refi rates. However, when you run into a wall and cannot get the money you need, give us a call. We can discuss your deal and give you some idea if we can often get you some insight on whether we can help before the call is over.