How to refinance a house you're renting out

It's not easy to refinance a house you're renting out
It's not easy to refinance a house you're renting out © Monkey Business Images/

Buying a home is an attractive proposition in these days of low mortgage interest rates and fallen house prices. But if you want to buy a new home, while renting out the old house, you could face a glitch. It might be hard to refinance a house that you're renting out.

That's because "things change when you're no longer dealing with a primary residence," warns Ben Chenault Jr., regional manager at Fairway Independent Mortgage in Birmingham, Ala.

"A lot of people want to jump on the great deals, but they still have their current home and don't want to wait for that home to sell," Chenault says. "They think, 'Aha! The rental market is good; I'll just rent it out.' But what if someone stops paying the rent? Are you sunk? If the answer is 'yes,' you probably shouldn't do it."

Let's suppose, for the sake of discussion, that you've already done it. Now you own two houses -- one that you occupy, and one that you don't. To cut monthly interest expense, you want to refinance the house you're renting out. It might not be easy. Here are some tips.

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The rules of real estate change when you're no longer dealing with a primary residence.

If you want to refinance a house you're renting out, it won't be easy.

Equity is a big hurdle with rental refis. Lenders often require 25 percent or more. They want owners to have a substantial stake in the home to reduce the chances of default.

Rental income doesn't help with refi qualification, unless the landlord is a professional property investor. Lenders are even more suspicious of rent if the tenant is the landlord's family member.

And sneaking in a refi before moving out gets dicey. It's a sensitive subject because it involves intent and loan fraud. Borrowers sign affidavits at closing to demonstrate intent to occupy the property to obtain a new owner-occupied loan. One year of residency is often a guideline to determine intent to occupy. But it's not an absolute rule.



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