Mortgage rates on a primary residence are somewhat straightforward; however, in the current housing market, many people are choosing to buy second homes and turn their old houses into rental properties. You can see the appeal – if there’s a good deal, you don’t want to wait for your current house to sell. So renting in the meantime is seemingly a smart alternative, except that it puts homeowners at the mercy of their renters, which can be daunting. And refinancing the mortgage on a “rental property” is different than with a residential property.
Lenders will require more equity on a rental property than they might on a primary residence. This is to demonstrate that homeowners are truly committed to their mortgage and it’s not a risky investment for lenders to make. If a borrower gets in over their head on the mortgage of their rental property, they may be more likely to default on the loan because they have less at stake.
Many homeowners assume collecting rent from their property will give them money to put toward their refinancing goal, but many lenders will discount this estimate income because it’s seen as unreliable. Lenders want to see history of payments and well-documented evidence of reliable income from this source. Often, that isn’t available unless you are a professional rental property manager.
Make sure you understand these and other common hurdles that may complicate the refinancing process on a rental property before committing to a new mortgage.