Traditional Bank/Broker Requirements to Refinance Rental Property
Lenders know there is a higher default rate on investment property loans versus a home mortgage. They see this as especially true in the event of a financial crisis. Therefore, banks and brokers consider loans to refinance rental properties as higher-risk.
Most of the loans only allow for a maximum loan-to-value ratio of seventy-five percent, which means you need at least twenty-five percent equity. However, some lenders will refinance a property up to one hundred percent of its appraised value. For this to happen, the borrower will have to be impeccable, from the borrowers’ credit, their cash position, other property leveraged, and their overall experience and history.
Because of the high risk, rental property refinancing will also likely be more expensive concerning the interest rate and fees. As an example, you can expect investment property refinance interest rates to a half a point to a point higher than the interest rate they could get for their own home. If you don’t have excellent credit, you are not likely to get a low-interest rate.
Many lenders will approve a loan to refinance rental property if you have a good credit score, at least 670. However, excellent credit, 740 or higher, will get you the best rates possible.
Income also matters. When it comes to overall income, sometimes rental income may not help. Lenders are often leery of revenue from rent unless you are an established property owner. If you want to increase your approval odds, you should have six months’ worth of reserves, or in other words, six months of payments set aside in your bank. By demonstrating cash reserves, your lender will believe that you will stay current, even if your property becomes vacant.
The last thing to consider is your debt-to-income ratio. Lenders will want to verify that you are not overextended or taking on too much debt. Your lender will evaluate your monthly debt versus your monthly income to determine your “debt to income” ratio or DTI. If you have a high ration, your approval odds are slim.