Refinancing an investment property has always been a major key to long-term profits. The reason is that while you can't control taxes, insurance, vacancies or repairs, it's possible to lock-in mortgage rates and in some cases actually see them decline.
Now may be the time for many investors to get new financing. Here’s why:
During the past 40 years, the typical interest rate for residential mortgages has averaged 8.6 percent according to Standard & Poor’s. That compares with a rate of roughly 4.2 percent at this writing for 30-year, fixed-rate residential financing. Investment mortgages, as always, are somewhat higher but closely track the up and down of residential rates.
In other words, interest rates today are less than half the rates typically seen during the past four decades. We don't know if rates will rise or fall in the future, but at this time, refinancing is an option that should not be overlooked. For more information, speak to a loanDepot licensed loan officer today for more information.
While rates are attractive, the real question is whether they are actually available. After all, claims of “tight credit” abound and lenders have traditionally set higher standards for investors. What can you do to have a better chance at today's discount mortgage rates if you have an investment property with one to four units? Here are five key strategies to help you better refinance at today's rates:
EXPECT ODD ACCOUNTING
In the world of mortgage underwriting, rental income is always less than it seems and some deductions can be a plus.
When looking at mortgage applications, lenders will reduce your reported gross rental income by 25 percent to account for possible vacancies and maintenance costs if you acquired the property subsequent to your most recent tax year filing. If you have owned the property for a year or more, lenders will use the rental income you reported on your tax returns, minus the expenses you reported.
On the other hand, lenders will add back any depreciation you reported. While depreciation is deductible for tax purposes, it is not an out-of-pocket cash expense. Thus, the result is that lenders “add back” depreciation when figuring qualifying income, effectively making it easier to get a loan for investment property.
KNOW YOUR LENDER'S RULES
Lenders are more liberal when refinancing primary residences because they are confident that residential borrowers will make every effort to pay off residential mortgages to keep a roof over their heads. With rental properties, they are less sure, which is why lending rules are tougher in for investors in several ways:
First, lenders will likely want to see at least six months of cash reserves from investors and in some situations might demand a full year. In comparison, the reserve requirement to buy a primary residence is often zero.
Second, the amount you can take out of an investment property is generally equal to not more than 75 percent of the fair market value if you refinance with a fixed-rate loan and 65 percent if you refinance with an ARM. In refinancing a primary residence, a 95-percent loan-to-value ratio is possible for qualified borrowers.
Third, while you can get an FHA mortgage with 3.5 percent down and a credit score of as little as 580 on a primary residence, the same is not true with an investment property. Lenders are looking for credit scores ranging from a minimum of 620 to a more-likely range of 660 to 700, depending on the loan-to-value ratio, the number of units in the property (one to four) and whether the loan is fixed or adjustable.
GET HELP FROM YOUR TENANTS
You can expect that the lender will want an appraisal – including a detailed, inside look at the property. This means you must set up an appointment at the convenience of the appraiser and give as much advance notice as possible to the tenant. It is also the time to tell the tenant why an appraisal is necessary and to explain that the appraiser will take photographs to document the valuation report – photographs that will be seen by lots of people. It is helpful if the tenants clean the place before the appraiser arrives, thus making a good valuation easier to justify.
EXPECT TO GIVE FULL DISCLOSURE
Yes, you only want to refinance one property, but the lender views you as the loan guarantor and will want to check every financial nook and cranny. The best approach is to start two files before you search for a mortgage: In one file, pull together needed personal documentation such as tax returns, bank statements, paystubs, W2s, retirement statements, etc. In the second, place materials related specifically to the property, such as the lease, property insurance account information and, if you're part of an HOA, the HOA's insurance policy for common areas.
BE WARY OF SHARED INTERESTS
If you own 25 percent or more in a corporation or partnership you may be required to disclose information to the lender for that business (i.e. business tax returns). One problem is getting the paperwork together, but a second issue is that other partners and shareholders may not want the information disclosed. If you're a big shareholder, consider this matter before applying for a mortgage and speak with your business associates.
While residential mortgages are fairly-standardized financial products, not all lenders have the same appetite for risk when it comes to refinancing an investment property. Shop around and you may be able to find lenders with more liberal qualification standards, higher loan amounts or lower rates.
A loanDepot licensed loan officer can answer any questions you might have about your financing. Call now for more information.