When your home’s value rises, you may be tempted to do a cash-out refinance and take some of your equity. A cash-out refinance also usually allows you to get a new mortgage at a lower rate. What about investment properties? Can you do a cash out refinance mortgage on an investment property, 2nd home or rental property?
The short answer is yes but the process and requirements are different than for your own home. The RefiGuide can help you today get to speed on requirements and rules for all of your second home and investment property loan needs.
Why Do a Cash-Out Refinance on an Investment Home?
By the end of 2024 summer, homeowners in the US had an average of $298,000 in home equity available.
That is much higher than the $158,000 average in 2020. If you own rental properties and have seen your values and equity rise, you may consider a cash out refinance on investment properties.
Whether you have an investment home or rental property, the cash out refinance rules are likely different than your traditional owner-occupied residences. Here’s why it can be a good idea:
Buy More Investment Homes
Many investors use a cash-out refinance on investment homes as a down payment for new properties. If you have enough cash, you may even purchase the property outright. This transaction boosts the size of your real estate holdings with gains from other properties.
Make Renovations
A cash-out refinance on an investment property could give you the funds you need to make repairs on the property. Or, you may want to make improvements on the investment home to boost its value.
No matter which option you choose, either idea may allow you to increase the rent and may increase the value. If the property rises in value over time, you might even sell it for more later and make up the cost of the cash-out refi. Also consider a 2nd mortgage for home improvements, as an alternative option.
Pay Off Personal Debt
Many homeowners like to get a cash out refi to pay off high interest debt, such as credit cards. The new interest rate on the home will be lower than credit cards, so you will save interest. Keep in mind that a refinance will cost you about 2% to 5% of the loan amount in closing costs.
Create An Emergency Fund
It’s usually smart to have at least three months of expenses saved for emergencies. But you may want to have more if you own rental properties. You could tap some of your rental property’s equity by doing a cash-out refinance on a rental home. Also consider taking out a home equity line of credit so you can write a check with a HELOC when needed.
Considerations for Cash Out on Rental Properties
Cash-out refinancing for rental property operates similarly to refinancing your primary residence. It involves obtaining a new mortgage based on your property’s current value, using the funds to settle the existing loan balance, and retaining the remaining amount in cash. Most lenders will expect you to have more equity when seeing cash out on a rental property because the risk factor is higher. The RefiGuide can help you find niche lenders that specialize in the cash out refinance on an investment property this year.
Requirements for Cash Out Refinance on Second Home
A second home or investment property is not occupied by the owner. This is important because the lender has more risk if they approve your cash out refinance. Thus, lender credit score requirements and LTV requirements are stricter than for a personal residence.
For instance, the credit score requirement for a rental property cash out refinance may be at least 640 or 680. In most cases, lenders only require a 620-credit score to do a regular cash-out refinance.
Note that you can only do a cash-out refinance on an investment property if it is a conventional loan. These are loans that adhere to the guidelines set by Fannie Mae and Freddie Mac, and they aren’t backed by the government. You can’t do cash-out refinances on loans backed by the FHA, VA, or USDA.
More details for cash-out requirements for investment homes include:
LTV Requirements for Investment Property Cash Out Refinance
The loan-to-value (LTV) measures the present mortgage balance against your property’s value. This number is also the amount of equity in your home. To be eligible for refinancing your rental property, you generally require: a minimum of 20% equity. While Fannie Mae guidelines mandate only 20% equity for refinancing an investment home, most lenders typically adhere to a 20 to 25% minimum.
Many mortgage lenders will limit the amount of equity that can be pulled out. They want you to be able to make the payment and to still have skin in the game. Fannie and Freddie base their LTV requirements on how many investment homes you own:
- One rental property: 75% LTV
- Two to four rental properties: 70% LTV
If you have more investment properties, the lender may require a different LTV.
Minimum Credit Score Requirement for Investment Property Cash Out
Your credit score has a large impact on if you will get a cash out refinance on an investment property. Your minimum credit score requirement also partially depends on the number of units you own:
- One rental property: If you have a debt-to-income (DTI) of 36% or lower and a 75% LTV, you need a 660 credit score. You need a 680 credit score if you have a 45% or less DTI.
- Two to four rental properties: You could need a 700 credit score, depending on what your LTVs are
Talk to our loan professionals at RefiGuide.org if you have more rental properties and want to know credit score and LTV requirements.
Cash Reserves
Your lender may also want you to have considerable cash reserves to get a cash out refinance on rental properties. With one property, cash reserves aren’t usually needed, but if you have more units, the requirements are different. Those with a higher DTI and low credit score made need a year of cash reserves to qualify.
Waiting Period
You can use your cash-out proceeds for whatever you like. But you cannot close the new loan until you have owned the property for at least 180 days. There are exceptions to this rule if you have inherited the home or you had it awarded in a divorce.
Cash Out Alternatives to Take Equity Out of a Rental Property or Investment Home
There are three popular alternative approaches to the traditional cash-out refinance for borrowers looking to get money secured by the investment properties. The home equity loan, HELOC line of credit and personal loan are common choices in 2024. Through a cash-out refinance, you substitute your current mortgage with a new one bearing a higher loan amount, enabling you to tap into a portion of your equity as cash.
Borrowers that already have a low interest rate on their investment home mortgage have been choosing a home equity line of credit or fixed equity loan because it offers the cash out they need and allows without requiring refinancing. Getting a home equity loan on a investment property is a very similar process to refinancing, as you will need a new appraisal, income and credit assessment from the lending underwriter. Compare the cash out refinance, HELOC and home equity loan.
Frequently Asked Questions
What Is a Cash-Out Refinance?
A cash out refinance is when a homeowner gets a new mortgage that is higher than what they owe. They receive the difference in cash, once closing costs are deducted. Many homeowners also do a cash-out refinance to get a lower interest rate or different loan term.
For example, if you owe $100,000 on your mortgage and qualify for a cash out refinance for $150,000, you would get approximately $50,000 in cash, after closing costs and fees.
Most people get a cash out refinance on their personal residence, but some may also qualify for a cash out refinance on rental property. However, investment property loans are riskier for lenders, so your rate could be at least .5% or .75% higher than on a standard primary residence refinance. Rates could be even higher if you pull out cash from the rental property.
What Are Cash Out Refinance Rates on Investment Property Loans?
This type of cash-out refinance loan is available for both primary residences and investment properties. However, because investment and rental properties are considered riskier, the interest rate on an investment property refinance is typically 0.5% to 0.75% higher than a traditional mortgage refinance. Cash out refinance rates may increase further if you have less equity and higher LTV. Check today’s interest rates on investment property refinance loans since the Federal Reserve cut key rates.
What is the Maximum Cash-Out Allowed on an Investment Property?
You should have a down payment of 15-20% when purchasing an investment property, limiting the Loan-to-Value (LTV) ratio to 80-85%. If you’re considering a cash-out refinance for an investment property, the maximum LTV typically ranges from 70-75%, varying based on your lender and the type of loan (fixed-rate or adjustable-rate).
Can You Use FHA on an Investment Home for Cash-Back Refinancing?
An FHA cash-out refinance is restricted to your primary residence. For refinancing a second home or an investment property, you’ll have to explore alternative options, such as a conventional cash-out refinance.
Does the VA Allow a Cash-Out Refinance on Investment or Rental Properties?
VA cash-out refinancing is exclusively applicable to primary residences and not investment properties. VA loans are primarily designed to assist individuals in financing their primary residences rather than businesses, secondary homes, or investment properties. Nonetheless, there are exceptions permitting the utilization of a VA loan for real estate investment purposes.
What Are Fannie Mae Guidelines for Cash Out Refinance on Investment Property?
Fannie Mae has specific guidelines for cash-out refinancing on investment properties, which include the following:
Existing Mortgage– The first mortgage being refinanced must be at least 12 months old, measured from the note date of the current loan to the note date of the new loan.
Leasehold Estates– The leasehold term must extend at least five years beyond the maturity date of the mortgage.
Debt-to-Income Ratio (DTI)– For manually underwritten Fannie Mae cash out refinancing, the maximum allowable DTI ratio is 36% of the borrower’s stable monthly income. The DTI limit can increase to 45% if the borrower meets specific credit score and reserve requirements.
Is there Cash Out Refinancing on Investment Homes for People with Low Credit Scores?
Yes and No. Traditional lenders do not offer a cash out refinance with bad credit on investment properties. However, Non QM and private money mortgage lenders do offer cash out loans on investment properties as long as you have a significant amount of equity. (30-40% equity depending upon your credit score)
Can You Use Cash Out Refinance to Purchase Investment Property?
You can also use cash-out refinance funds as a down payment on a new investment property or even purchase the property outright. This is a unique opportunity for homeowners to increase their wealth with real estate. Homeowners should take advantage of income producing properties that allow you to grow your real estate portfolio by leveraging the gains from your initial investment.
Summary on Cash Out Refinancing on Investment Properties and Second Homes
A cash-out refinance on an investment home can be a useful financial tool. You may use the money for home repairs, buying new properties, or paying off debt, among other options. You also may get a lower rate. However, you need to have an appropriate credit score, DTI, and LTV to qualify. Keep in mind that interest rates will be higher on investment properties. The underwriting process will take longer, as well.
If you’re ready to pull cash out of your investment property, the participating cash-out lenders and bankers at the RefiGuide are ready to help!
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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