July 9, 2019
When you buy a home with a mortgage loan, you generally have the option later down the line to apply for cash-out refinancing on that home.
It doesn’t matter if you have a conventional mortgage, VA loan, or an FHA home loan, cash-out refinance options are available once you have made a minimum amount of mortgage loan payments (not ideal) and the cash-out options only get better the longer you pay on the original mortgage.
Why is cash-out refinancing not such a great deal in the earliest days of your mortgage? Partially because you haven’t paid down the loan enough and/or waited for your property values to increase long enough in the right circumstances to get much value out of the property.
Generally speaking, the longer you pay on the mortgage, the more your cash-out refinance borrowing power can increase.
But that doesn’t address the main question asked in our headline-can a borrower refinance a rental property?
If you purchased a multi-unit home with an FHA mortgage, you are allowed to rent out the unused living units and may even be able to use projected income from that rental (depending on a variety of circumstances including lender requirements and the borrower’s experience as a landlord) to qualify for the loan.
But the catch is, the home must still be owner-occupied.
FHA loan rules state that at least one borrower obligated on the mortgage must occupy the home as the primary residence. This is a condition of FHA loan approval and that rule applies to FHA cash-out refinances.
So in order to determine whether you qualify for an FHA cash-out refinance loan (in terms of occupancy), you must get a “yes” answer to the following questions:
- Do I have an FHA or non-FHA mortgage on a property I am using as a rental unit?
- Have I owned the property for at least 12 months prior to the refinance loan application?
- Have I occupied the property for at least 12 months prior to the refinance loan application?
If the answer to these questions are all “yes”, you are eligible to apply for an FHA cash-out refinance loan.
If you are renting a property you need to refinance in this way but do not currently live there, you will need to occupy the property for 12 months before you apply. You will also be required to maintain occupancy after the loan closes as a condition of loan approval.
These requirements are NOT lender standards, and lender rules above and beyond what is mentioned here may be applicable. State law and other factors may also play a part in loan approval for cash-out refinance loans.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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