- Fannie and Freddie buy loans for rental properties.
- You may not need a 75% LTV to qualify for a refinance.
- You will need more documentation if you wish to include rental income.
Fannie Mae & Freddie Mac Require 6 Items From Investors Before Refinancing Rentals
Refinancing a rental property, which some lenders call an investment property, is exactly like refinancing an owner-occupied residence, with six additional requirements.
To understand the basic requirements for an owner-occupied refinance, see this Bills.com Home Refinance article to learn the basics of a refinancing a home loan, and the refinance calculator to learn if a refinance makes financial sense for you.
Six Additional Requirements for Refinancing a Rental Property
- 620 Minimum Credit Score
Generally speaking, the minimum credit score for up to 5 investment properties is usually 620. For 5-10 properties, the credit score requirement is higher than 620 (720 at some lenders). Credit score minimums vary by lender, and over time.
- Higher Appraisal Costs
The appraisal will generally cost more (in some cases $150 more) than an owner-occupied home. You may wonder why an income-producing property needs an appraisal. From the lender’s perspective, it still needs to do a market value analysis of comparable properties to justify the loan amount.
- Two Years of Rental Income
If you wish to include income from your rental property or properties, you need to document two years of rental income. If you cannot show two years of rental income, you cannot use it for calculating your debt-to-income ratios. If you have other investment properties, the lender will allow you to count the rents from those income properties if you can document the previous two years.
The lender may require third-party validation of rental income if you rent your property or properties.
- Higher Fees
Freddie Mac and Fannie Mae charge post-settlement fees that do not apply to owner-occupied loans.
Reserve requirements for income properties are higher than for an owner-occupied property. Requirements vary, but lenders will usually require you have 6 months of monthly payments in an account.
Conversely, if you have a negative cash-flow from your rental property or properties, that must be included as an obligation in your DTI calculation.
- Low LTV
Traditionally, lenders of investment properties will allow borrowers to go up to a 75% loan-to-value (LTV). Under the HARP program, lenders will refinance 100%+ LTVs. By contrast, lenders will allow up to an 80% LTV for owner-occupied properties.
Fannie and Freddie offering refinances for investor-owned properties with high LTVs. If your loan is owned by Fannie Mae, contact any mortgage lender and ask about Fannie’s DU Refi Plus. If your loan is owned by Freddie Mac, then consult with your loan servicer about Freddie’s automated refinance program. Manual underwriting is also available from Fannie and Freddie, but only up to a 75% LTV.
Rental Property Refinance Sources
As of 2012, nearly all investors of rental property loans are Fannie Mae and Freddie Mac, and private investors of rental properties have largely withdrawn from the market. The FHA and VA do not participate in rental property loans or rental property refinances.
You can find refinances for several types of investment properties. However, the common threads to qualifying Freddie and Fannie loans are
- The properties must have four or fewer units
- Not be a resort or hotel
- Purchase, straight refinance, or cash-out refinance
- 15 through 30-year fixed-rate mortgages
- 5- or 7-year balloon loan
- Not for the property’s developer, builder, or seller
Refinancing a rental property is more difficult than refinancing an owner-occupied property. One source of pre-screened refinance lenders is Bills.com. Follow the link just mentioned to be connected with a lender that serves your area and based on the information you provide, is able to discuss a loan for your situation.