It can be a fantastic financial move to refinance rental property that can help you lock in a low-interest rate and reduce your monthly payments. It allows you to withdraw equity from the rental real estate to pay for improvements, maintenance, or even another real estate investment.
However, refilling a rental property can be much trickier than refinancing your home. You might not get a rate as low as you think, no matter the current mortgage rate. You will also have to meet much stricter requirements to get approved with the best possible rates.
How To Get Better Refinancing Rates For A Rental Property
It can be tough to ignore current mortgage rates advertised as significantly lower than what you are paying. However, the interest rates for rental real estate loans differ much from borrowers who refinance their primary residence.
Real estate lenders consider doing cash out refinance on rental property much riskier than traditional homes. If you have unforeseen financial hardships, lenders agree you are more likely to pay for your primary residence mortgage and default on the properties you don’t live in. It doesn’t matter if that assumption is valid; the overall perception of risk is critical in rates that real estate lenders are willing to offer. Therefore, it’s best to compare different refinance rental property rates from several lenders before finalizing.
Requirements That You Need To Meet For Refinancing A Rental Property
Though the process of getting a lower rate when you refinance a rental property is similar to refinancing your primary residence, there are some key differences that you must be prepared for. Given below are some important requirements that you will find common among most real estate lenders:
Low Debt-To-Income Ratio
If you have a high DTI ratio, you will be a more significant risk for your lender. Before you refinance a rental property, do everything you can to pay all your current debts and improve your debt-to-income ratio.
Most real estate lenders would like to see you own at least 20% of your rental real estate. Therefore real estate lenders prefer you to have more equity in the property. It is always better if you have more skin in the game.
Safe Cash Reserves
Rental properties are a huge and ongoing expense for an owner. They usually require constant maintenance and repairs to function correctly. This is why most real estate lenders need at least six months of cash reserve, for they let you refinance a rental property.
Safe Credit Score
A good credit score means you will have access to better loan terms. It proves to the lenders that you are a trustable borrower who always pays their dues on time.
Steps To Refinance a Rental Real Estate
Like any other kind of refinance, the better you prepare, the easier the process will be. Here is everything can expect when you cash out refinance rental property.
When you refinance a rental property, you must submit several documents that help your lender confirm your future income from rental payments. It will help them better understand your financial situation and approve of you. These documents include the following:
- Tax returns
- Current lease agreements
- Pay stubs and W2s
- Any current lease agreements
- Apply and lock an interest rate
Along with all the requested documents, you will also have to apply to get your refinance rental property process started. After you get approval, you must lock in your interest rate. Your interest rate locks can last anywhere from 15 to 60 days, depending on your chosen lender.
Wait For Your Underwriting.
In the underwriting stage, your real estate lender will check your current financial standing. They might reach out for explanations or clarifications on the documents you submit. Ensure you answer all their concerns promptly. It will help you stay on track and reach the closing table. They may also look at your property’s appraisal results to ensure your loan is on par with the market value.
A professional title company will conduct a proper search to find out if there are any title-related issues. It can mean uncovering claims or liens on the property that you must sort out before closing. If you get an owner’s policy, you can save a lot of closing costs and receive a reissue rate.
Your real estate lender will send you an official closing disclosure three days before your closing date. It will cover all information and expenses related to your refinance, including taxes, loan amount, closing costs, appraisal fee, and interest rate. On closing, you will sit with the title company and sign all paperwork to finalize your refinance.
If You Have Any Doubts, Contact Real Estate Funding Solutions For Clarity!
Our Real Estate Funding Solutions team has helped several real estate investors find the best terms when refinancing a rental property. Our years of training and experience have helped us successfully close deals in the past and can help guide you through the process quickly. By helping you prepare beforehand and understand how the process is different from rental properties, you can easily have success. Call our team at 855-913-8637 for more information.