What are the guidelines for an investment property refinance?
If you're considering getting a cash-out refinance loan, it's important to note that the eligibility requirements are slightly stricter than they would be if you were refinancing your primary residence. We've listed them below to give you an idea of what you can expect to hear from a lender.
Maximum loan-to-value ratio
First, there's your loan-to-value ratio to consider. In real estate, a loan-to-value ratio (LTV) is a measure of your current loan balance compared to the home's value, or the amount of equity you've built up in the property. In practice, lenders will put limits on how much equity you can borrow against because they want you to maintain a stake in the home so you'll be likely to keep current with your monthly payment.
While Fannie and Freddie's eligibility requirements differ slightly for cash-out refinances on primary residences, both government-sponsored enterprises agree when it comes to investment properties. Their maximum LTV requirements are as follows:
- Investment property (1 unit): 75% Fixed/ARM.
- Investment property (2 to 4 units): 70% Fixed/ARM.
Minimum credit score
Your loan-to-value ratio is also important in determining the minimum credit score you'll need to qualify, as is your debt-to-income ratio (DTI). For example, single-unit borrowers who have a DTI of less than or equal to 36% and an LTV of less than or equal to 75% are only required to have a credit score of 660. However, if your DTI is closer to 45%, the minimum credit score raises to 680. On the other hand, 2-to-4-unit borrowers may require a credit score of up to 700, depending on their ratios.
Similarly to your credit score, the amount of reserves you have to have on hand depends on the other aspects of your financial profile. In this case, a single-unit borrower with a low LTV and DTI may not have any official reserve requirement at all. However, a multi-unit borrower with a high DTI and lower credit score may be required to show that they have up to 12 months of reserves in the bank.
Overall, most investors will be required to be able to show that they have six months' worth of their mortgage payment in reserves when doing a cash-out refinance, so it's best to plan on needing at least that amount.
Many investors have plans of using a cash-out refinance to fund their fix-and-flip investment strategies. While this is allowed, be aware that unless the property was inherited or legally awarded to you in a divorce or separation, a waiting period will apply.
Unless you qualify for an exception, you will not be allowed to do a cash-out mortgage refinance until you have owned the property for at least six months. Additionally, if you do qualify for an exception, your maximum LTV will be capped at 70% rather than the usual 75%.
Delayed financing exception
There is one more exception that might allow you to receive funds from a refinance just days after you've closed on the home. It's known as the "delayed financing exception," and it applies to buyers who've used cash to buy the home. In this case, all you would need to do is be able to prove that you purchased the property outright and show the source of the funds. Then, you should be able to do a cash-out refinance to make improvements to the property.
Is refinancing investment property right for you?
Ultimately, the choice of whether to refinance an investment loan is a personal one. Only you know your financial situation and your reasoning behind wanting to access more cash. If you have questions regarding your eligibility for this process, don't hesitate to reach out to a loan officer in your area. Even if refinancing is not the best choice for you, they may be able to point out alternatives like a home equity loan or HELOC.