First Person: Why Refinancing a Rental Is More Complicated Than Ever

Yahoo Contributor Network

If you are thinking that now might be a great time to refinance one of your rental properties, think again. While rates are low and the process relatively easy for home owners who are refinancing a primary residence, those of us wanting to refinance our investment properties are discovering that standards are tougher than ever.

We are in the middle of refinancing one of our rentals, a house that we built in 2006 for $280,000. We currently owe $101,000 against the property; $89,900 of which was a mortgage at 7.5% and another $11,000 on a personal equity line which was borrowed to finance some extensive water damage back in 2010. Since our credit was stellar and the house was cash flowing, we figured that borrowing $101,000 would be a cakewalk.

Were we ever wrong.

Refining a rental property is unbelievably complicated, far more complicated than a simple mortgage on a new house. Here are just a few of the problems that we've encountered.

Higher interest rates.

Those great interest rates that everyone has been talking about? They aren't available for rentals. The best we could get was 4.1% which while still excellent, isn't the 3.5% we've seen advertised around town.

Low, low appraisal

I knew that values were down in our neighborhood, thanks to a market flooded with repossessed homes that are being sold at 'fire sale' prices. What I didn't expect was that our house would appraise for $30,000 less than the tax assessment of $160,000. Since we were getting a conventional loan, a mandatory 20% equity position limited our borrowing power to $104,000.

Higher reserves

During the housing boon, many lenders waived the 6 month cash reserve requirement for new property owners. That condition is back, along with an additional 3 months of reserves for investment property owners.

Higher Debt-to-Income (DTI) ratio.

A debt-to-income ratio is the percentage of borrowed debt measured against income. Going into the refinance, we were at a solid 34%. According to our lender who wouldn't count our trust income but did factor in a rather high estimate for annual repairs and maintenance, our DTI has now jumped to 49%. To make the deal swing, I had to cash in part of my IRA.

Stacks of paper work

Along with the paperwork that is normally required for a home refinance, rental property owners are required to provide lenders with additional information including signed leases, copies of retirement accounts, Paypal accounts, self employed income projections and more. The constant need for more and more paperwork has pushed our refinance into its 9th week… and we're still not done.

Is this the new standard in refinancing a rental property? Perhaps so. This may explain that while I'm hearing plenty of positive stories about people who have been able to refinance their homes, I've haven't met a single person who has successfully refinanced an investment property. With these complicated conditions, I can see why.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

More by this contributor:

How to pay down your mortgage faster.

How to maximize the profit on your rental property.

The surprising new fee in home mortgage refinancing

View Comments