As past real estate market conditions have caused homeownership rates to decline, the need for a rental property has surged over the last several years, boosting the demand for investment properties. Refinancing investment properties can be an attractive option due to the factors; such as long-term ownership, higher property values, reduced loan balances through amortization and increased rental rates. It’s important to note 5 crucial variables that make lending standards for investment properties different from those of a primary residence.
1. Higher rates
Mortgage interest rates depend on a variety of factors, but one of the most influential factors is the risk involved. Refinance rates for rental properties will generally run higher than those for a primary residence, because of the importance or personal value placed upon the property itself. The reason behind this is the fact that borrowers who reside in a mortgaged home as their primary residence are less likely to default – opposed to real estate investors who have little personal attachment to a property they don’t occupy.
2. Contrasting polices
Due to the notion that various lenders have different policies depending on the property type, area or financial condition of the borrower, it’s important to shop around in order to get the best terms to suit your needs. Not all lenders are going to treat investors the same.
3. Equity requirements
Investment real estate always comes with greater equity requirements. Investment property owners of single family rentals should be prepared to have 25% equity and be prepared to get no-cash-out refinancing for a home with 5% positive equity. Cash-out refinancing generally enables primary homeowners to have an 80% loan-to-value ratio, but restrains investment property owners to have no more than a 75% loan-to-value ratio.
4. Maintain a good credit score
Credit scores that are measured as “good” (640-720) are general requirements when refinancing an investment property. Lenders define “good” credit scores as:
- A solid credit score
- 1-2 year lease with solid payment history
- Having reserves equal to the equivalent of six monthly payments in the form of savings, retirement accounts, stock, etc.
5. Evidence of rental income
The evidence that lenders usually require is an arms-length rental income. Leases with great payment histories will prove to a lender that you’re a solid landlord and property owner and can manage to pay for a second mortgage. Generally speaking, an entire lease and tax filings from the past 2-3 years are two financials to be prepared to present.