After the mortgage crisis hit, as an investor it became very difficult to purchase and refinance multiple residential properties. To begin helping take excess housing stock off the market, Fannie Mae amended its guidelines in late 2009 for purchasing and refinancing more than four properties. To refinance more than four rental properties, you must adhere to the Fannie Mae guidelines. If you have fewer than four, you have more choice and few restrictions.
When you refinance a property, you replace an existing, older mortgage with a new mortgage. You may refinance to take advantage of a lower interest rate or to change the length of your mortgage. You may refinance to pull cash out of properties that have either increased in value or for which you’ve paid down the balance.
Two to Four Properties
If you own two to four properties, you can either refinance or cash-out refinance if you have sufficient equity in your properties. If you pull cash out, you can use the cash for a down payment and reserves on a later purchase. If you refinance single-family homes, each of your properties must have a maximum loan-to-value ratio (LTV) of 85 percent. If you refinance two- to four-unit properties, they must have a maximum LTV of 75 percent. As the borrower, you must meet standard credit assessments -- essentially the same as what's required if you were to refinance your own home.
Five or More Properties
If you own five to 10 properties, to refinance your properties as one grouping you must adhere to Fannie Mae’s 5-to-10 Properties Financed program rules. Your minimum “middle” credit score must be 720 or higher, and you cannot have filed for bankruptcy or had a foreclosure in the last seven years. In addition, you cannot have any late mortgage payments within the last 12 months.
To refinance five to 10 properties, you must provide two years of tax returns showing rental income from all the rental properties you are re-financing. The maximum loan-to-value is 70 percent for all property types from one to four units. Therefore, if each of your five rental homes appraises for $150,000, you can refinance up to $105,000 per home or $525,000 total. In addition, you will need six months of reserves for each property to cover the principal, interest, taxes and insurance on all the properties you intend to refinance.
Not All Mortgage Lenders
Not all mortgage lenders lend under the 5-10 Properties Financed program. For many residential mortgage lenders, the extra work involved is just too difficult. Instead of reviewing basic tax returns and paystubs, you will likely submit tax returns with several schedules, 1099s and additional supporting documentation to comply with the requirements. The loan officer has to reconcile and verify all these documents. Furthermore, because the 5-10 Properties Financed program loan qualifies as one loan, the lender receives the same compensation as with one property. If you own more than 10 properties, you must use a commercial mortgage lender.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.