You can refinance a rental property through most of the same loan channels available for a primary home, but the bar is higher. To refinance a rental property under a conventional program, plan on at least 15 to 30 percent equity, a credit score of 680 or better, and cash reserves covering several months of payments. Rates and closing costs also run higher than on an owner-occupied loan, because lenders treat investment mortgages as more likely to default.
Rate-and-Term or Cash-Out
Two refinance types dominate, and they have different equity requirements. A rate-and-term refinance swaps your existing loan for a new one to lower the rate or change the loan structure, without pulling equity out. A cash-out refinance does the same and hands you the difference between the new loan and the old balance as a lump sum.
Under Freddie Mac’s conforming loan guidelines, a rate-and-term refinance on a single-unit investment property allows a maximum loan-to-value ratio of 85 percent, so you need at least 15 percent equity. Cash-out drops the cap to 75 percent LTV, meaning 25 percent equity. Two-to-four-unit properties are tighter still: 75 percent LTV for rate-and-term and 70 percent for cash-out.1Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
What You Need to Qualify
Credit Score
Fannie Mae ties the minimum score to both the transaction type and the LTV. For a cash-out refinance on a single-unit investment property, you need a 720 when your LTV is above 75 percent, or a 680 at 75 percent LTV or below. Rate-and-term thresholds are slightly lower: 680 above 75 percent LTV, 640 at or below.2Fannie Mae. Eligibility Matrix A higher score also gets you a better rate, which matters because investment loans already carry a premium over primary-residence pricing.
Debt-to-Income Ratio
Your DTI includes the proposed new mortgage plus every other recurring debt. Fannie Mae caps this at 36 percent of stable monthly income for manually underwritten loans, with room up to 45 percent when compensating factors are strong.3Fannie Mae. B3-6-02, Debt-to-Income Ratios Owning multiple financed properties can push you toward the ceiling fast, so run the numbers before you apply.
Cash Reserves
Lenders want proof you can keep paying if a tenant stops. Fannie Mae requires at least six months of principal, interest, taxes, and insurance in verified accounts for any investment property transaction.4Fannie Mae. Minimum Reserve Requirements If you own additional financed properties, expect to show reserves for those too. Retirement and brokerage accounts generally count, though the lender may discount them for withdrawal penalties or market swings.
Seasoning
Seasoning rules control how soon after purchase you can refinance. For a cash-out under Fannie Mae guidelines, at least one borrower must have been on title for six months, and the first mortgage being paid off must be at least 12 months old, measured from note date to note date.5Fannie Mae. B2-1.3-03, Cash-Out Refinance Transactions Rate-and-term seasoning is often shorter or nonexistent depending on the lender and program.
How Rental Income Counts
Lenders don’t give you credit for every dollar your tenants pay. Fannie Mae requires them to multiply gross monthly rent by 75 percent and qualify you on that reduced figure. The other 25 percent is a built-in vacancy and maintenance cushion.6Fannie Mae. Rental Income
The rent figure comes from current lease agreements or a market-rent appraisal (Form 1007 for single-unit, Form 1025 for multi-unit). Underwriters cross-check that against the rental income reported on your most recent Schedule E, and large discrepancies slow the file down.
Documents to Gather
You’ll need personal income verification alongside property records. Fannie Mae requires two years of signed federal tax returns, all pages and schedules, whenever rental income is used to qualify.7Fannie Mae. General Income Information Schedule E is the piece the underwriter cares about most. Add W-2s or 1099s for any employment income and recent bank and investment statements to prove reserves.
For the property itself:
- Fully executed lease agreements for every unit
- A rent roll with tenant names, lease terms, and monthly amounts
- The most recent property tax bill
- A current mortgage statement showing balance, payment, and loan number
- The insurance declarations page
The lender will also order a professional appraisal to confirm current market value and LTV.
What It Costs
Refinancing a rental costs more than refinancing your own home. Total closing costs generally run 3 to 6 percent of the loan amount, depending on property type and loan size.
Appraisal and Title
A single-family rental appraisal typically runs $300 to $500, with multi-unit and complex assignments considerably higher. Title search and a new lender’s title insurance policy add several hundred to over a thousand dollars depending on value and location.
Lender and Government Charges
Origination fees usually run 0.5 to 1.5 percent of the loan amount. You’ll also pay recording fees to the local government and prepaid escrow deposits for taxes and hazard insurance. Your lender must deliver a Closing Disclosure listing every fee at least three business days before signing.8Consumer Financial Protection Bureau. What Is a Closing Disclosure? Compare it line by line against the Loan Estimate you got when you applied.
Check for a Prepayment Penalty
Before you refinance, look at whether your current mortgage carries a prepayment penalty. The federal restrictions that cap prepayment penalties on consumer mortgages generally do not apply to investment property loans, because the qualified-mortgage rules exclude credit extended for a business or commercial purpose.9Consumer Financial Protection Bureau. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Penalty clauses are common in the first three to five years of many investment mortgages. Factor that cost into your break-even math.
Taxes on the Refinance
The cash you take out is a loan, not income, so you owe no income tax on the proceeds regardless of how you spend them. What you do with the money, though, affects whether the interest on the additional borrowed amount is deductible.
Points (prepaid interest) on a rental refinance can’t be deducted in the year you pay them. You spread the deduction across the term of the new loan. If you refinance again before that term ends, any unamortized points from the prior loan may be deductible in the year of the new refinance, unless the new loan is with the same lender, in which case the balance carries over to the new term.10Internal Revenue Service. Publication 527, Residential Rental Property Other closing costs like appraisal and title charges are generally not deductible as rental expenses and are not added to basis.
Mortgage interest on a rental is normally deductible as a rental expense on Schedule E. If you take cash out and spend it on something unrelated to the rental, such as a car or personal debts, the IRS interest-tracing rules limit your deduction to the portion of interest tied to the original loan balance or to proceeds used for the rental.10Internal Revenue Service. Publication 527, Residential Rental Property Interest allocated to non-rental use can’t offset rental income.
DSCR Loans When Conventional Doesn’t Fit
If your personal income or DTI knocks you out of a conventional refinance, a debt service coverage ratio (DSCR) loan is worth a look. DSCR lenders qualify you on the property’s rental income relative to its debt payments rather than your personal earnings or tax returns.
The key metric is the property’s gross rental income divided by total monthly debt service (principal, interest, taxes, and insurance). Most DSCR lenders want a minimum ratio of 1.25, meaning the property produces at least 25 percent more income than its monthly obligations. Some accept ratios as low as 1.0 with extra reserves.
Credit thresholds tend to be slightly lower than conventional (often 660), but rates run higher. Maximum LTV generally lands between 70 and 80 percent. DSCR loans are popular with investors whose returns show low personal income after depreciation, and with those who hold property in an LLC, since many DSCR lenders will lend to the entity directly.
If the Property Is in an LLC
Many investors hold rentals in an LLC for asset protection, and this complicates a conventional refinance. Fannie Mae and Freddie Mac programs require an individual borrower, not a business entity. If the property sits in an LLC today, you’ll usually need to transfer title to yourself, refinance in your personal name, and then decide whether to move it back.
Moving it back carries risk. Nearly every residential mortgage contains a due-on-sale clause letting the lender call the loan if you transfer ownership. The federal Garn-St. Germain Act shields certain transfers, including transfers into a living trust where the borrower remains a beneficiary, but transfers into an LLC are not on the protected list.11Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions Deeding a freshly refinanced property into an LLC can give the lender grounds to accelerate the whole balance.
Investors who need LLC ownership typically go with a commercial loan, portfolio loan, or DSCR loan that lends to the entity. The trade-off is a higher rate and shorter term than conventional financing.
Closing Timing Is Different
From application to closing generally takes 30 to 45 days. One difference from refinancing a primary home matters at the end: investment property transactions do not carry a federal three-day right of rescission. That waiting period under Regulation Z applies only to loans secured by a principal dwelling.12Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission The new lender can fund and pay off your old mortgage right after closing, without the extra three business days you’d see on your own home.