Many homeowners refinance their mortgage for a variety of reasons. Sometimes it’s just to get a lower interest rate to make the payment more affordable. Other homeowners refinance in order to tap into their home’s equity.
No matter the reason that you want to refinance, can you do so if you don’t live in the home?
Owner Occupancy Requirements
Technically, it’s much easier to refinance an owner-occupied property, but you don’t have to live there if you want to refinance. This is only because you’ll have more loan options. If you live in the home, you can use any of the following programs to refinance:
If you don’t live in the home, your options are much more limited. You can’t use any of the government-backed programs for a non-owner occupied home – they are strictly for primary residences. The only options you have are Fannie Mae or Freddie Mac conventional loans, but there are a few exceptions.
VA Loan Exceptions
If you already have a VA loan, you may be able to refinance with the VA streamline refinance program. Otherwise known as the Interest Rate Reduction Refinance Loan, this program allows you to refinance your loan with little verification and unlike the purchase VA loan, you don’t have to certify that you’ll live in the home.
Technically, VA loans are only for owner occupancy use, but you can get an exception from the VA for any of the following reasons:
- You outgrew your home (your family size increased and is too large for the home)
- Your job relocated you at least 50 miles from your current home
The VA must approve your reason for not occupying the property and you must refinance with the VA streamline program in order to move out of your VA financed home. If you keep your VA purchase loan, you certified that you’d live in the property, which means moving out and not selling the home violates your agreement.
FHA Loan Exceptions
The FHA offers a similar streamline refinance program that the VA offers. The difference with this program is that you must certify that you’ll live in the home for at least 12 months after refinancing with the program.
After 12 months pass, you may move out of the home and rent it out or use it as a second home. The VA streamline refinance doesn’t have the 12-month requirement, but you must have the approval of the VA to move out of the home while keeping your VA financing.
Conventional Loan Options
Now when it comes to conventional financing, you have many more options, even if you don’t live in the property.
Conventional loans typically provide the lowest interest rates and most attractive terms. Most notably, they don’t charge Private Mortgage Insurance once you owe less than 80% of the home’s value. FHA and USDA loans, on the other hand, charge the mortgage insurance for the life of the loan regardless of your loan-to-value ratio.
Whether you want to refinance the loan to adjust the rate/term or you want to take cash out of the home, you can borrow up to 75% of the home’s value with a conventional loan refinance. In order to qualify, you’ll need:
- At least a 680 credit score unless you have a much lower LTV than 75%. In these cases, Fannie Mae/Freddie Mac may allow a credit score as low as 640. This is the case only if you have a debt-to-incomer ratio lower than 36%
- If you have a DTI higher than 36%, but lower than 45%, you’ll need a minimum credit score of at least 700 for most lenders, if they allow the higher DTI
- At least six months of reserves on hand. Refinancing an investment property or even a second home is riskier than refinancing a primary residence. If you can’t make the payments on your primary residence, you will probably work much harder to find a way to make ends meet than you would with a second home or investment property.
The Waiting Period
Many loan programs require a waiting period or seasoning period before you can refinance your loan, whether you live in the home or not.
FHA loans require you to wait six months before you use the FHA streamline refinance program. This gives the FHA and lender a chance to see that you can afford your payments and that refinancing will work to your benefit. If you want to take cash out of your owner-occupied property, the FHA doesn’t have a seasoning period. However, since most borrowers put down the minimum 3.5% on an FHA home purchase and the FHA only allows a maximum 85% LTV, chances are that you’ll have to wait several years before you have any equity in the home.
VA loans typically require a six-month seasoning period for both the VA streamline refinance and the VA cash-out loan. Typically, VA loans are only for owner-occupied properties, but you may be eligible for an exception that we discussed above for the streamline refinance. If you want to take cash out of your home’s equity, you’ll need to prove that you’ll live in the home, though; there aren’t any exceptions for VA cash-out refinance loans.
Conventional loans don’t have a waiting period for a rate/term refinance, but if you want to take cash out of your home, whether an owner-occupied home or investment home, you’ll need to wait at least six months. The only exception to this rule is if you paid cash for the home. This is called ‘delayed financing.’ Many investment buyers pay cash for the home to get around any issues with the property that would prevent mortgage approval. They fix the home up and then tap into the equity with a cash-out refinance to recoup some of their investment.
The bottom line is that you don’t have to live in the home to refinance it, but it’s certainly easier if you do live in the home. Any mortgage that you get on a home that you don’t live in poses a high risk of default for lenders. They will generally charge higher interest rates, require higher fees, and have stricter requirements to qualify for the loan.