Can You Do a Cash-Out Refinance on an Investment Property?

A cash-out refinance is a financial transaction where a homeowner replaces their existing mortgage with a new, larger loan, receiving the difference in cash. This process allows access to accumulated home equity. An investment property is real estate acquired primarily to generate income through rent or potential resale, rather than serving as a primary residence.

It is possible to perform a cash-out refinance on an investment property to unlock capital. Individuals may pursue this option to access equity for further real estate investments, to fund property improvements, or to consolidate existing debts.

Borrower and Property Eligibility

To qualify for a cash-out refinance on an investment property, both the borrower and the property must meet specific criteria. Lenders require a strong credit history, with minimum credit scores ranging from 620 to 700. This is generally more stringent than for primary residences, reflecting the increased risk perceived by lenders for non-owner-occupied properties.

A borrower’s debt-to-income (DTI) ratio is a significant factor, measuring monthly debt obligations against gross monthly income. While some lenders may accept a DTI up to 45-50%, a lower ratio, such as below 36%, can result in more favorable loan terms. Lenders verify income through documentation such as two years of tax returns, W-2s, pay stubs, and bank statements. Additionally, many lenders require borrowers to have cash reserves equivalent to six to twelve months of mortgage payments after the refinance closes.

Regarding the property, a substantial amount of equity is necessary, requiring a loan-to-value (LTV) ratio of 70-75% for investment properties, meaning the new loan cannot exceed 70-75% of the property’s appraised value. This LTV limit is generally lower than for primary residences. The types of properties that qualify include single-family homes, multi-family units, condos, and vacation rentals, provided their primary purpose is income generation.

A professional appraisal is a requirement to determine the property’s current market value and rental income potential. Lenders impose a seasoning period, typically six months, meaning the borrower must have owned the property for at least that long before applying for a cash-out refinance. To assess these qualifications, applicants will need to provide personal financial statements, existing mortgage statements, lease agreements for rental income verification, property tax records, and proof of homeowners insurance.

Financial Characteristics of Investment Property Cash-Out Refinance

The financial structure of a cash-out refinance for an investment property presents distinct characteristics compared to a primary residence. Interest rates for investment property loans are higher, ranging from 0.25% to 1% above those for owner-occupied homes. This difference reflects the increased risk lenders associate with properties that are not the borrower’s primary residence.

The maximum loan-to-value (LTV) limits are more conservative for investment properties, set at 70-75%. This lower LTV directly impacts the maximum cash amount that can be drawn from the property’s equity. For instance, if an investment property is valued at $500,000, a 75% LTV would allow a maximum loan of $375,000, from which the existing mortgage balance and closing costs would be subtracted to determine the cash-out amount.

Closing costs are a financial consideration, ranging from 2% to 5% of the total loan amount. These costs encompass various fees, including loan origination fees, between 0.5% and 1.5% of the loan. Appraisal fees for investment properties may range from $500 to over $1,000 due to the added complexity of evaluating rental income potential.

Common closing costs include title insurance, varying by loan amount and location, costing $700 to over $2,000. Attorney fees may apply, ranging from $300 to $1,000, depending on the jurisdiction. Recording fees, charged by local government agencies for registering the new mortgage, range from a few dollars to several hundred. The final cash-out amount is determined by subtracting the existing mortgage payoff and all applicable closing costs from the new, larger loan amount.

Navigating the Cash-Out Refinance Application

Initiating a cash-out refinance on an investment property begins with selecting a lender experienced in investment property financing, as their requirements can differ from those for primary residences. After identifying potential lenders, the next step involves pre-qualification or pre-approval. This initial phase provides an estimate of the potential loan amount and interest rate based on a preliminary review of financial information.

Following pre-qualification, a formal application is submitted, requiring detailed personal and financial disclosures. This submission is accompanied by documents such as proof of income like recent pay stubs, W-2s, and two years of tax returns, and bank statements. Property-specific documents, such as existing mortgage statements and current lease agreements for rental income verification, are required.

The property appraisal, arranged by the lender, determines the investment property’s current market value. This appraisal considers the property’s potential rental income in addition to comparable sales. Once all documentation is submitted and the appraisal is complete, the application moves into underwriting.

During this phase, the lender reviews the borrower’s creditworthiness, income stability, the property’s value, and conducts a title search. This comprehensive review can take several weeks, two to four weeks. The final stage is the closing, occurring at a title company or attorney’s office. At closing, the borrower signs the new loan documents, and the funds are disbursed. The existing mortgage is paid off, and the cash-out amount is provided to the borrower. The new mortgage is then officially recorded with the county. After closing, borrowers should note the first payment due date, which is 30 to 45 days after the closing date.