refinance

How to refinance a house you're renting out

You need plenty of equity
You need plenty of equity © Andy Dean Photography/Shutterstock.com

Often, equity is the biggest hurdle in the effort to refinance a house you're renting out. Lenders typically require a cushion of 25 percent or more to refinance a loan secured by a nonowner-occupied house, says Stephen LaDue, a senior loan officer at Prime Lending in Brookfield, Wis. The reason: An owner who has a substantial stake in the property is less likely to default on the mortgage.

"If you're upside-down or have a minimal investment, you might walk away," LaDue observes.

Some lenders might be a bit flexible about credit scores, income and cash reserves, but that 75 percent maximum loan-to-value ratio is usually a "hard and fast rule," Chenault adds.

A second mortgage on the rental house will make refinancing difficult because that lender probably won't agree to remain in the lesser position if the first loan is refinanced. The term for this willingness to go back to the end of the line is "resubordinate."

"Whoever has the second mortgage probably won't be willing to work with us," Chenault says.

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