Yes, you can refinance a rental property, and the process looks much like refinancing your own home, with tighter rules at every step. Lenders want more equity, a higher credit score, and more cash in the bank, because borrowers tend to default on an investment loan before they stop paying on the house they live in. Expect a rate premium over primary-residence mortgages, more paperwork, and a few quirks around how rent is counted and how proceeds are taxed.
Rate-and-Term or Cash-Out
Which type of refinance you want sets your minimum equity. A rate-and-term refinance replaces your existing loan with a new one, usually to lower the interest rate or move from an adjustable to a fixed rate, without taking any money out. A cash-out refinance does the same and lets you pull equity out as a lump sum you can use for another down payment, improvements, or anything else.
Under Freddie Mac’s conforming loan guidelines, a rate-and-term refinance on a single-unit investment property allows up to 85 percent loan-to-value, so you need at least 15 percent equity. Cash-out drops that ceiling 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 and your LTV. On a cash-out refinance of a single-unit investment property, you need at least a 720 if your LTV is above 75 percent, or 680 at 75 percent and below. Rate-and-term thresholds run a little lower: 680 above 75 percent LTV and 640 at or below.2Fannie Mae. Eligibility Matrix Higher scores also pull your rate down, which matters more here than on a primary-home loan because investment pricing starts higher.
Debt-to-Income Ratio
Your total DTI includes the proposed new mortgage along with every other recurring debt payment. Fannie Mae caps the ratio at 36 percent of stable monthly income for manually underwritten loans, with room up to 45 percent for borrowers who have strong compensating factors.3Fannie Mae. B3-6-02, Debt-to-Income Ratios Owning several financed properties can push you to the limit quickly. Run your numbers before you apply.
Cash Reserves
Lenders want evidence 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 other financed properties, plan on showing reserves for those too. Retirement and brokerage accounts generally count, though lenders may discount their value for withdrawal penalties or market swings.
Seasoning
Seasoning rules decide how soon after buying you can refinance. For a Fannie Mae cash-out refinance, at least one borrower must have been on the title for six months before the new loan funds, 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 depends on the lender and program and may be shorter or absent.
How Lenders Count the Rent
If you lean on rental income to qualify, you won’t get credit for the full rent check. Fannie Mae tells lenders to multiply gross monthly rent by 75 percent and use only that figure. The missing 25 percent is a built-in cushion for vacancy and maintenance.6Fannie Mae. Rental Income
The rent figure comes from your current lease or a market-rent appraisal, and the lender will cross-check it against what you reported on your last Schedule E. Large discrepancies slow things down.
Documents to Have Ready
For personal income, Fannie Mae wants signed federal returns for the most recent two years, with all pages and schedules, whenever rental income is used to qualify.7Fannie Mae. General Income Information Schedule E is the key page. You’ll also need W-2s or 1099s for any job income and recent bank and investment statements to verify reserves.
For the property, pull together:
- Fully executed leases for every unit
- A rent roll with tenant names, lease terms, and monthly amounts
- Your most recent property tax bill
- A current mortgage statement showing balance, payment, and loan number
- The insurance declarations page showing coverage, limits, and premium
The lender will also order a professional appraisal to confirm market value and check that your LTV fits the program.
What It Costs
Closing costs on a rental refinance generally run 3 to 6 percent of the loan amount, higher than on an owner-occupied refinance. A single-family appraisal typically runs $300 to $500, with multi-unit and complex assignments costing more. Title search and a new lender’s title policy add several hundred to over a thousand dollars depending on value and location. Origination fees generally run 0.5 to 1.5 percent of the loan. You’ll also pay local recording fees and prepaid escrow deposits for taxes and 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 commit, read your existing loan for a prepayment penalty. The federal rules that limit penalties on consumer mortgages carve out credit extended for a business or commercial purpose, which is how most investment property loans are classified.9Consumer Financial Protection Bureau. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Prepayment clauses are common in the first three to five years of investment property mortgages. If yours has one, add that cost to your break-even calculation before you move forward.
Tax Effects of a Cash-Out
Cash-out proceeds are loan money, not income, so you owe no income tax on them no matter what you do with the funds. How you use the money, though, controls whether the interest on the new borrowing stays deductible.
Mortgage interest on a rental is normally deductible as a rental expense on Schedule E. The IRS interest-tracing rules limit that deduction when you pull cash out and spend it on something unrelated to the rental, like a car or personal debts. Only the interest tied to the original balance or to proceeds actually used for the rental qualifies as a rental expense.10Internal Revenue Service. Publication 527, Residential Rental Property
Points you pay on a rental refinance can’t be deducted all at once. You spread the deduction over the term of the new loan using original issue discount rules. 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 rolls into 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.
If Conventional Doesn’t Fit
DSCR Loans
If your personal income or DTI won’t support a conventional refinance, a debt service coverage ratio (DSCR) loan qualifies you on the property’s rental income instead of your tax returns. The ratio is gross rental income divided by total monthly debt service, including principal, interest, taxes, and insurance. Most DSCR lenders want at least 1.25, meaning rent must be 25 percent higher than the monthly obligation. Some accept 1.0 with extra reserves.
Credit minimums for DSCR programs usually sit around 660, lower than conventional, but rates run higher and maximum LTVs typically land between 70 and 80 percent. These loans are popular with investors whose Schedule E shows little income because of depreciation, and with those who want to borrow in the name of an LLC.
Properties Held in an LLC
Many investors title rentals in an LLC for liability protection, which complicates a conventional refinance. Fannie Mae and Freddie Mac programs require an individual borrower, not an entity. The usual workaround is to deed the property out of the LLC into your personal name, close the refinance, and then decide what to do about ownership afterward.
Moving it back is where people get hurt. Nearly every residential mortgage has a due-on-sale clause that lets the lender call the loan if you transfer ownership. The 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 Transferring a freshly refinanced property into an LLC can give the lender grounds to accelerate the full balance.
Investors who need entity ownership usually turn to a commercial loan, portfolio loan, or DSCR loan that lends directly to the LLC. The trade-off is a higher rate and a shorter term than conventional offers.
Timeline and Closing
From application to funding, a rental refinance typically takes 30 to 45 days. After you submit documents, the file moves to underwriting, where your income, assets, credit, and the appraisal get verified against program guidelines. Expect requests for clarification along the way. Complex files or busy appraisal markets stretch the timeline.
Once the underwriter signs off, the Closing Disclosure arrives at least three business days before signing.8Consumer Financial Protection Bureau. What Is a Closing Disclosure? You sign at a title company or with a mobile notary, and the lender wires funds to pay off the old loan.
One timing difference matters. The three-day right of rescission under Regulation Z applies only to loans secured by your principal dwelling, so investment property transactions carry no federal rescission waiting period.12Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission The new lender can fund and pay off the old mortgage immediately after you sign.