Now that we’ve gone over everything that you can use a refinance for, it’s time to take a look at how you can refinance your own property. Before you can refinance your investment property, you’ll need to build some equity. Lenders have different requirements for how much equity you have to have in your property before you can refinance. Many lenders want to see a loan-to-value ratio (LTV) that’s lower than 75%, meaning you’d need to have at least 25% equity in your property. Your lender will ask you for a few documents to begin the refinancing process, including:Step 1: Build Equity
Step 2: Gather The Proper Documents
- Proof of income: You’ll usually have to show the lender your original pay stubs from the last 30 days. Your lender may ask for a bank statement or another form of income validation if you’re self-employed.
- Copies of your W-2 or 1099 forms: Lenders require your W-2s or 1099 forms because they use them to verify your employment history and your income. Your lender may also ask to see your full tax return if you’re self-employed and will require this information from everyone you include on the loan.
- Proof of homeowners insurance: This shows the lender that you have enough homeowners insurance coverage on the property to protect your investment.
- Copy of your title insurance: Your title insurance helps your lender verify that the property is yours to refinance. It also provides the lender with a legal description of the property and information on taxes.
- Copies of your asset information: Your lender will want to see your assets, including bank statements, investment account information and retirement savings.
Gather the proper documentation before you apply for refinancing to help speed up the process. Keep more than one copy available in case you need to resend any documents.
Step 3: Compare Refinance Rates and Apply
Refinancing a rental property is usually less complicated than buying a home. Don’t be afraid to shop around and compare rates from different lenders to ensure you’re getting the best deal on your investment property refinance. It’s not uncommon to find a better deal with a new lender, but your relationship with your current lender could also work to your advantage if you are in good standing.
Once you’ve settled on a lender, contact them to begin the application process. Complete the lender’s application, submit the requested documents and respond to any inquiries quickly.
Step 4: Lock Your New, Refinanced Rate
Once your lender approves your application, you’ll usually have the option to lock down your interest rate. This gives you time to read your refinancing terms without worrying about your interest rate changing. Rate locks may last 15 – 60 days, depending on your lender. Your location and loan type may also play a role in how long your rate lock lasts.
If you’re happy with the rate you get, lock it in through your lender as soon as possible. If not, you can “float” your rate and proceed with the loan. If you float, keep in mind that your rate may either go up or down, depending on how market rates change.
Step 5: Go Through Underwriting
Your lender will proceed with the underwriting process after you lock in your rate. During underwriting, your lender verifies your income and assets as well as the condition of the property. Similar to when you bought the home, the lender also orders an appraisal.
An appraisal determines the fair market value for a home and shows your lender that the price you’ve agreed to pay for a home is fair. Appraisals are also often used to estimate property taxes. Make sure your home is looking its best before your appraiser arrives. You may also want to put together a list of upgrades you’ve made to the home since you bought the property.
If the property currently has a tenant, you will want to coordinate with them for the appraiser to access the property.
Step 6: Close On The Loan
After underwriting concludes, it’s time to close on your new loan. Closings for refinances happen more quickly than home purchases. At least 3 business days before your closing meeting, your lender gives you a document called a Closing Disclosure.
Your Closing Disclosure covers the details of your new loan, as well as any closing costs or fees you need to pay. At your closing, you’ll sign all of your documents and ask any last questions you have about your loan. If your lender owes you money, such as during a cash-out refinance, you’ll see it in your bank account within the next few days.
