How to refinance a house you’re renting out

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Refinancing isn’t just for your primary residence. If you’re a real estate investor, now may be a good time to think about saving interest on your rental properties as well.

By and large, refinancing a rental property is similar to doing so with your primary residential mortgage, but there are some differences to be aware of.

Read on to see how refinancing a rental is different, and some advice for real estate investing.

Expect stricter requirements

Borrowers have a little more flexibility to qualify for their primary mortgages, but lenders tend to be less lenient with investors.

While you may be able to finance as much as 96.5 percent of your primary home value, you’ll probably need to have much higher equity in a rental property, or a higher loan-to-value ratio.

Banks may also look more carefully at your income and other financials. It’s also important to be able to prove that your units are not vacant.

“There isn’t a lot of difference between rental property and personal property. The main one is getting that lease,” said Tom Schneider, head of Roofstock Academy, an investor education program run by the real estate investing marketplace, Roofstock.

The rest of your portfolio matters, too. If you own multiple rental properties, you may not be able to get financing through a traditional bank.

If you do have a larger portfolio, that doesn’t mean you won’t be able to refinance though, you probably just won’t be able to do it at your local retail bank.

“It’s called asset-based lending,” said Jason Haye, western director of sales at Velocity Commercial Capital. “There’s usually not as strict credit requirements, because the property doesn’t have credit,” he added. “At the bank, not only are you going to have the same property requirements, but you’ll also have personal income requirements. We’ll look at the property alone.”

Having tenants is crucial to a rental refi. “It seems basic, but make sure you have a renter in there,” he said. “It’s supposed to be an income-based property, and if it’s vacant, it’s generating zero. It doesn’t matter where you go, that’s not good.”

Expect higher mortgage rates

Lenders generally consider rental properties riskier investments than primary residences, so your new rental mortgage rate will probably be higher than what you could get on your main home.

“They’re not as great as you might be able to get for your personal property, but there’s not a huge delta,” Schneider said. He added that at traditional lenders, the average rental mortgage rate is usually about 50 basis points higher than that for a primary mortgage.

If you have to go through a more specialized lender like Velocity though, Haye said you should expect even higher rates.

“On the investment side, you can do 4s,” he said, compared to rates on primary 30-year fixed mortgages, which are hovering around 3 percent.

On loans for which Velocity requires less documentation, Haye said, rates could be even higher, like 6 or 7 percent. But those loans are less likely to experience the same delays as mortgages from traditional banks, which are experiencing serious backlogs.

“More expensive money is generally faster,” he said.

Shop around and prepare your documents

As with pretty much all financial products, it’s a good idea to shop around and talk to a few lenders before you move ahead with a refinance. It’s important to compare terms and determine which offer works best in your situation.

“The vetting process of selecting your lender is really important and the two key things in identifying a lender is what is their origination cost,” Schneider said. “Lenders who have a higher origination cost sometimes have a lower interest rate and vice-versa,” he added. “Be sure to measure that tradeoff.”

Finding a lender will take more effort. This is where a mortgage broker who specializes in such loans can help. Once you’ve selected a lender, it’s a good idea to get your documentation in order well in advance.

The amount of documentation you’re going to need can be a headache, Schneider said. “Having that in order ahead of time, especially if you have multiple properties,” can really help smooth the process along.

He added that it’s a good idea for real estate investors to keep organized files for all their properties, that way you’ll avoid having to scramble for documents when the bank needs them.

Bottom line

The refinancing wave isn’t just for primary properties. Investors could stand to save if they’re able to find the right deal, so shop around, get your documents ready, and go into the process with eyes open about what to expect.