Documents Needed To Refinance A Rental Property Mortgage

Mortgage Rates Today for 30 year fixed, 5/1 ARM, 3/1 ARM, 1/1 ARM

If you haven’t refinanced your property in the past several years, it’s worth checking the latest rates today. The 10-year yield is back below 2.5% as Wall Street economists scurry to revise down their interest rate assumptions once again. I swear they have the best jobs on Earth because they never, ever have to be right.

I am a firm believer that interest rates will stay at these levels +/- 1% for years. Information transfer is instant nowadays thanks to the internet, and policy makers are much more adept at managing inflation and unemployment in America. As a result, go with an ARM rather than a 30-year fixed mortgage to save yourself money.

The general rule is that any time you can lower your interest rate by 50 basis points (0.5%) and break even within two years, you should refinance. Nothing is more beautiful than locking in a low rate and paying down the loan with ever-weakening dollars thanks to inflation.

Unfortunately for landlords, refinancing a primary mortgage is simple compared to refinancing a rental property. The reason being that refinancing a rental not only requires various Home Owners Association board members to cooperate with the process if you own a condo, the bank does much more due diligence.

From the banks point of view, lending money for a rental is riskier because the default assumption is that you require rental income in order to pay back the mortgage. Therefore, the bank needs to add an added margin of safety in the form of a higher mortgage rate to compensate for their risk. Rental mortgages are usually 25-50 bps higher than a primary residence mortgage.

I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years. But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term. 

DOCUMENTS NEEDED TO REFINANCE YOUR PROPERTY

Refinancing a rental property is kind of like having an upset stomach in the middle of a 10-hour bus ride to nowhere. The more you can prepare yourself for hell, the better. Once you get through the process, you can sit back and enjoy taking advantage of cheap money for years. The following are documents specific to a rental property refinance, but they can overlap with a primary residence refinance as well.

* Rental lease. The bank wants to see that you have a tenant, and what the rental income number is to assume in their underwriting calculations.

* Proof of rent deposit. One can easily forge a rental lease agreement, so the bank wants to see a record of the rental deposit that verifies with the rental lease.

* HOA meeting notes, and financial reserves. To get this info, you’ve got to ping your HOA President, Secretary, and Treasurer. It is painful to bother other people, so make sure you are on good terms.

* Homeowners Association insurance. The bank needs to know the HOA entity, and all the property outside your walls are insured.

* Homeowners insurance. You must also have insurance that protects the inside of your walls, otherwise a bank won’t lend.

* Bank statements to show your cash balances. The more cash you have the better obviously. Banks will generally ask for the last two months.

* Brokerage statements to see your semi-liquid assets. These statements aren’t as vital, but will often be asked.

* 401k/IRA statements. These statements aren’t asked often, but they are good to have if your income or credit score is a little light, and you need some extra firepower to get you over the hump.

* K1 forms if you invest in private companies. Even though my private equity investments have nothing to do with my cash flow, the bank still requests the statements every single time. These statements are usually a drag on your finances since you’re investing in speculative companies that are often loss making.

* Credit report(s). The banks should pull your credit as part of your refinance fee. Although you should seriously consider checking your credit score for free before applying to save you any hassle or embarrassment.

* W2 form. Probably the most crucial of all documents. If you don’t have one, you’ve got to emphasize your other income streams and assets. Most entrepreneurs and freelancers with less than two years of self-employment income will have a brutal time getting a mortgage. The other alternative is getting an asset based loan.

* A personal letter. It’s always a good idea to humanize yourself and explain why you would like to refinance your rental property. Talk about how your rental property is something you cherish for your retirement. Tell them how you first lived in the home and plan to keep it forever. It’s all about creating a personal connection to help get you over the hump.

One thing I advise is to never give the bank more than they ask. You want to provide just enough so that you qualify and no more. Your mortgage officer will likely say the same thing after asking for your initial statements. You will be dealing with the mortgage officer, who acts as a liaison with the mortgage underwriter. Your mortgage officer is on your side, but the underwriter decides your fate.

BE PREPARED FOR A LONG REFINANCE

Depending on your income situation, getting a mortgage or refinancing now can get very tricky, especially for rental properties. Lending standards are still tight, despite the government promoting first time home buying programs that allows for only 3% down. It’s always curious to see how the government says one thing and does another. Here’s a very candid perspective of why it’s so hard to get a mortgage from a loan officer’s perspective. You might not like what he has to say, but it’s worth hearing his perspective.

It’s important to always refinance your property before you quit your job and no longer earn W2 income. Another logical thing to do is to always refinance your primary residence before you make it a rental.

Refinancing a rental property will test your patience and your sanity. But if you can get through the multi-month long process, you will save a ton of money in the end.

Recommendation for homeowners and homebuyers: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Rates are reaching year lows again. When banks compete, you win.


Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Sam,
    I refinanced my condo rental in September 2012. The loan was at 5% 30 yr fixed that I got while living there. After it was rented, I was able to refi down to 3.75% as an investor, again 30 yr fixed rate. Rates were very low at time. That refi went smoothly in 30 days. They only wanted the signed lease in addition to the normal statements.

    But I was recently looking to finance a new condo rental and my broker said things have changed since 2012.

    Now they are adding an extra 1/8th for condos, plus an extra 1/4 for putting only 20% down vs. 25%. I also ran into problems with owner occupancy rates and HOA delinquency percentages. Had to walk away from a deal 5 days before closing (full post on it next week).
    -RBD

    • says

      Owner occupancy rates in an HOA can indeed be a stumbling block. To many rentals in an HOA, and no dice for a loan. In SF, I think it’s anything over 30% of units as rentals and the banks make things very difficult. Anything over 50% is pretty much impossible to get a refi. Good luck! 3.75% for a 30yr fixed is good… although I still went with 2.5% for my latest primary.

  2. S says

    Sam,

    I have two rental properties:

    Property A – FMV of approximately $325,000, Loan balance of approximately $160,000, Rate of 5.5%

    Property B – FMV of approximately $375,000, Loan balance of approximately $245,000, Rate of 4.375%

    Both are rented out, but at this point under month-to-month leases with long-term tenants.

    I have explored refinancing, but cannot seem to find a lender that would make it worth my while.

    What kind of rates do people think are available for refinancing?

    FYI – I took your advice and this past spring refinanced my residence to a 5-year ARM at 2.875%, down from 4.75%. Was able to roll a 2nd at a 7.5% into it, so it is saving me quite a bit monthly. Thanks for convincing me to do it.

    • says

      Hi S,

      I’m assuming Property A and Property B at 5.5% and 4.375% are 30-year fixed loans? What I’m seeing now online is 3%. I got my new primary 5-year ARM at 2.5%, and if I were to refi my new rental, it would go from 2.625% to 3%, so I kept it as is as I have 3 more years left at 2.625%.

      Nice job refinancing down to 2.875% for your residence. Paying almost a 2% spread is way too much for a 30-year fixed. Good for banks. Not good for us!

      I wonder how many folks will still argue with me on a 30-year fixed if they have the option to do a ARM. Rates have been coming down now for 30 years + in a row.

      Sam

  3. says

    We refinanced both of our rental properties when rates were at their lowest. We went ahead and put them on 15 yr. fixed loans so we wouldn’t have to go through it again. It has been a while since we ran the numbers, but we saved tens of thousands of dollars by doing so and will knock considerable time off their payoff schedule. It was really a no-brainer. I can’t remember exactly what the change was, but I know one of the loans went from 6.25 percent to 3.75 percent! =)

    Like you said, it was a huge, drawn-out pain. They asked for all of our documents several times and nitpicked over every detail.

  4. says

    We gave refinancing the rental home some thought, we plan to pay off the rental in less than 3 years and decided the cost vs benefit wasn’t big enough to apply. I know it goes against some general thoughts on paying off the rental, but it’s part of the early retirement plan and will be income for us in the near future.

  5. Another Reader says

    Refinances are out for most investors with more than four properties and all investors with more than 10, unless you can find a portfolio lender. The terms for portfolio loans aren’t generally all that attractive anyway.

    I was fortunate to refinance four rentals through the HARP program in 2012 and 2013. Rates are in the 4’s for 30 year terms, which are not bad for rentals. I would have done two more, but the servicer chose to get very greedy about points and fees plus they quoted a higher rate than the others. Moving to a new lender under HARP generally does not work, because the new lender has to start over with “reps and warrants.”

    I did my own property on a Wells Fargo streamline program at the bottom of the market, closing in December 2012. I’m locked in at 3.125 percent for 30 years for the conventional maximum. Since I pulled cash out in 2009 to buy foreclosures and short sales for cash, I think of my house mortgage as rental mortgages in part.

    I also moved a really high rate but fairly small old rental mortgage that did not qualify for HARP to my HELOC. Will be paying that off over the lock period.

    My first mortgage in early 1984 was a builder buy down at 11.75 percent. You will have to excuse me if I’m not quick to grab those adjustable rates. The mean I expect we will revert to at some point in the future is probably a little higher than what you expect.

    The mortgage market insanity has forced investors to be both creative and patient. It’s not been fun, but it has been educational.

    • says

      Well done on taking advantage of the HARP program for not one, but four rentals!

      I thought the HARP program was for struggling homeowners, or reserved only for one mortgage, and also not for HELOCs?

      Teach me how to take advantage of government subsidies!

      Thanks!

      • Another Reader says

        The HARP program was expanded around 2012. My theory during those uncertain times starting when HARP was announced was to call all the servicers that held my Fannie/Freddie loans every three to four months to see if the rules had changed. For a couple of years, all I heard was “no.” I got wind of the program expansion from some real estate and mortgage blogs I follow. I called one servicer, and they said yes. The others continued to say no. About a year later, the dam broke. I called Chase and they did the two for which they had just acquired servicing rights. In fact, a couple of days after I called, I received a letter asking me to refinance. The last one was done in mid-2013.

        These were all low doc, no income criteria or verification loans. My guess is they were done for two reasons. One was that someone finally realized a lot of product was in the hands of investors, and the loans and foreclosures would drag the market down for much longer unless the pig was pushed through through the python. Second, the big servicers probably earned some brownie points by upping the HARP volume.

        The Freddie backed loan was not done, as Freddie never expanded the four loan limit. That was the high interest loan that got moved to the HELOC. Middle finger raised in a salute to Freddie.

        The two Fannies that were not done are serviced by Nationstar. Sadly, they are using the HARP program to sell high fee, over market rate HARP refi’s through their subprime arm, Greenlight. Talking to their rep was like talking to a used car salesman.

        The only thing I can tell you about how to get the government cheese is to stay up to date on the doings at the cheese factory and be persistent. Or as I call it, cheerfully optimistic.

        • says

          Great stuff. I hope other people with conforming loans read this. Stay on top of the government!

          I guess I’m out for most of my loans b/c they are jumbo, and therefore not Fannie/Freddie loans.

          But, I did get a sweet, out of the blue no cost loan modification from BOA in January, 2013. Went from 5.875% down to 4.25% for a 30-year. Not bad! Beggars can’t be choosers.

          How To Get A Free Loan Modification

          My latest journey isn’t doing so well. It’s been 2.5 months now for another loan mod. Will write a post.

          • S says

            Everytime I talk to a lender about using HARP, once I tell them it is a rental property, they tell me I am out of luck. Can someone confirm that property owners can use HARP?

  6. Money Beagle says

    I’d be interested but I’m about 2.5 years into my 15 year mortgage. I don’t want to do another 15 year mortgage, and I don’t want my monthly to go up, so a 10 year wouldn’t work. I’ll probably look closer to when I’m near the 10 year point. As I’m under 3.5% right now, I don’t think I would even find anything or much better to make it worth the while.

  7. Jason says

    I’m glad to hear that you’re predicting low rates in the future. I have some purchases coming in the new year and it would be great to get in under 5%.

    I haven’t refied a rental yet, but even with the requirements you listed, it doesn’t seem that different than a primary residence refi. You still need many of those docs in any case, with the exception of rental and maybe HOA docs. One thing I do know that makes a difference, though, is picking a good lender that has their act together.

    Little anecdote: I talked with my bank about a second on my house and they were talking about only 4% on a fixed rate. The HELOC was even less at 3.125%. It was very tempting to get an extra 100k for investment, but although that money may add income in the future, it would have to be paid back and that would delay retirement. So it’s a no-go.

    • says

      I’m pretty confident you’ll be able to borrow under 5% for years to come.

      Getting the HOA to cooperate is a big one, especially if you aren’t living in your rental. Homeowners don’t like landlords in their complex. The HOA will also charge you for work and documents they provide, and so they should. You are at the mercy of the President or Treasurer’s time as well.

      I’ve been tempted with HELOCS, too, and I never take them. No need to set myself up for more temptation.

  8. Chris says

    Just bought a primary home (#4) and got a 5/1 ARM at 3%. I’m pretty happy with that considering I don’t plan on staying more than about 4-5 yrs.

    I hear you on the rental refi’s-I’ve been tempted to put my head through a wall while trying to refi rentals!

    On another note, how is the new primary coming along for you Sam? Renovated? Moved in?

    Chris

    • says

      Renovating as we speak. Last project is expanding a bathroom, upgrading to new windows, and perhaps creating a couple decks in order to site outside with a glass of wine, write, and watch the sun set into the ocean. I might run out of money before then though! haha.

      3% 5/1 ARM is not bad at all. Good on you for now paying more.

  9. says

    I don’t care what the math says, I’m a fan of fixed rate mortgages (especially at low rates for shorter terms!). I don’t like uncertainty and I have no interest in going through the remortgage nut roll any more often than I have to.

      • says

        I don’t think I’m agreeing or disagreeing. I just prefer a slightly higher rate 15 year fixed mortgage, mainly because it does away with uncertainty and lessens the chance that I’ll have to do another refi in five years, which I find to be a big pain in the butt.

        Our last refi was the VA streamline, designed to be easy, but it was still a lot of hassle.

  10. spence says

    Congrats on your low rate..that loan is almost free. :) I have a couple of rental properties that I refinanced last summer. An 8 plex with 329k balance at 5.0% 15 yr fixed and a fourplex (225k balance) at 4.25% 30 yr fixed. I wanted longer term fixed rates bc I was afraid of rates going up in the future. Why do you think rates will stay low for a long time? Is it bc the economy will not be on fire anytime soon?

    Getting a refinance on the 8 plex was tough bc it requires a commercial loan, as does anything over 5 units. The rates and terms are worse than I could get on the 4plex.

    I have recently started reading your blog and enjoy it.

    I am envious of your single tenant residential property that pulls in 8500/mo or whatever. That is close to what I bring in with these twelve units but I have to manage 12 units! Well done.

    • says

      Thanks mate. 4.25% on a 30year fixed ain’t too shabby, but I stand behind my conviction that rates won’t be going up much at all. They’ve been going down for 30+ years now, and information has become instant and policy makers are more adept.

      I don’t think I could handle managing 12 units. But, if you have a property manager to manage, then you are doing better than me b/c I manage my rentals myself.

      I’m surprised by the $8,700/month as well. But that’s the power of inflation. The mortgage interest is less than $2,200 a month, so the spread really is pretty sweet. Maybe it’ll hit $10,000 a month in the next renewal two years from now w/ Uber, AirBnb, Box going public and Apple at all time highs. Who knows!

  11. says

    We are thinking about refinancing our property at some point. We are on a 30 year loan with just under 4% in interest. It used to be over 5% but we negotiated with the lender to lower our rate 2 years ago. Our interest rate was raised a little this year but luckily it is not as bad as it used to be.

  12. Alex says

    I refinanced my primary residence two years ago, and prior to doing so I polled every property owner I knew or met to find out what the longest time period that anybody held a mortgage before refinancing or selling the property. Out of ~50 people, not one person held a mortgage for greater than 9 years, most averaged 6-7 years. And yet, almost every one of them still stressed that I needed to get a 30 year fixed. It’s funny how opinions and facts can differ so much. I ended up going with a 10-1 ARM at 3.125% saving over 1 percentage point.

    I’m now looking to buy a new residence with another 10-1 ARM and rent out my current house. With my low rate and rents in the area rising, it will cash flow very nicely.

    I haven’t had any trouble with the lending process. The wife and I are both W-2s, and banks love W-2s.

    • says

      Yes, banks love W2s for sure, which is why one must get a mortgage or refinance before losing their W2 income.

      Very interesting poll, and very true since the average duration a homeowner lives in their house is 7-8 years. I wonder if it’s going lower, like how the average person stays at his/her job goes lower.

      A 3.12% 10/1 ARM sounds pretty good to me. Although I’m still a taker of a 2.5% 5/1 ARM.

      • Matt says

        Sam,

        I think the average time in a home is going to go longer in the upcoming decade. People seem less willing to pull up roots and move for one thing. The second is that if interest rates increase in the future, people will be less willing to move because they can’t take their fixed rate mortgage with them into a new home. This is called mortgage lock.

        • says

          Maybe. But I don’t think interest rates are going up any time soon and I think more people realize life is too short not to pursue your dreams and take risks. The internet has made mobility much greater and easier.

          One no longer has to be stuck in the middle of nowhere if they aren’t happy. At the same time, the internet allows people to geoarbitrage.

          I really think urban areas like SF, Manhattan, West LA get much more crowded over time, and the rest of America continues to get hollowed out.

  13. says

    Banks do not like rental units! Credit has always been tighter for rental united. The exception is single family homes because they normally have market values. The banks will increase interest rates or require higher down payments or equity to reduce their perceived risk.

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