Refinancing a rental property is similar to refinancing your primary home with one major exception: you need to document the rental income. A rental property needs to generate income, or it is simply a second home. The process for refinancing a rental property starts long before you call the lender: it starts the moment you accept a tenant. It is important to sign a formal rental agreement and declare the income on your taxes in order to position yourself for a refi.
Call your existing mortgage holder and a mortgage broker to apply for a refinance. Speaking with more than one lender provides you with multiple quotes to ensure the lowest interest rate and fees.
Complete the refinance application with the lenders offering the best interest rates and loan programs. Have your personal income documentation and bank statements available in order to answer the application questions.
Ask each lender to send you a Good Faith Estimate for review. The GFE will list the proposed loan amount, interest rate, APR, fees, and discount points associated with your loan. Compare each line item and determine which lender is offering a better loan program. Sign the paperwork associated with the best offer and return right away. Underwriting will begin once the lender has received your signed loan paperwork.
Provide any documentation the lender requires of you. In order to prove rental income you may be required to provide the lender with your rental agreement, proof of rent payments, tax returns with Schedule E, and proof of homeowners insurance. The lender uses the information to determine what your rental income is, which typically is 75 percent of the monthly rent. The remaining 25 percent accounts for a "vacancy factor." Even if you have had a long-term tenant, the lender requires the vacancy factor to ensure you can afford the mortgage if the home is empty for a period of time.
Provide your tenant with a notice to inspect the property. Visit the property while your loan is being underwritten and before the appraiser visits so you can arrange for any needed repairs.
Inform the tenant that an appraiser is coming to the home and coordinate the appointment between both parties. The lender typically orders an appraisal after making sure that your debt to income ratios -- that is, your income compared to your expenses -- meet the loan requirements.
Schedule an appointment to sign your loan documents once the lender informs you that the loan is approved and the documents are ready. Signing will typically take place at the lender's office or an escrow company. Bring your initial GFE and compare it to the final one to ensure the rate and fees are the same as what you were initially offered. Make sure you are satisfied with the final loan terms prior to signing.
Confirm the new payment amount, due date, and payment instructions with the lender. They will send you copies of your final loan paperwork and payment coupons in the mail.
Items you will need
- Personal income documentation
- Bank statements
- Rental agreement
- Tax returns with Schedule E
- Insurance policy
- Properly document your rental income by creating a separate bank account for your rental property. If there are any questions as to rent payments or expenses, you can easily refer back to one bank statement.
- The more expenses you write off on your rental property, the less rental income a lender will assign you.
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