If you have investment properties that have equity in them, you may want to tap into that equity, and it may not be a bad idea.
Leaving equity in an investment property may leave money on the table. You can repurpose those funds to fix up the investment property to secure more rent or to sell it for a higher value. You can also use the funds to purchase more investment properties, enhancing your real estate portfolio.
So how do you take cash out of your investment property’s equity? Keep reading to find out more.
Conventional Loans are the Answer
The only loan program that allows you to purchase and/or use a cash-out refinance is the conventional loan. All government-backed loans, including the FHA, VA, and USDA loans are only for owner-occupied properties. Conventional loans are a bit more lenient in that respect, but there are lower LTV allowances and stricter requirements.
We’ll start with the allowed LTV or loan-to-value ratio. Conventional loans allow you to borrow up to 75% of your home’s value if you take a fixed rate loan. If you opt for an adjustable rate loan, you may only borrow up to 65% of the home’s value.
The above guidelines are for Fannie Mae loans. Some lenders offer another alternative – Freddie Mac conventional loans. While Freddie Mac allows the same LTV on fixed rate loans, they do allow investors to borrow up to 75% of their home’s value with an adjustable rate loan as well. Freddie Mac loans are good for borrowers that need that slightly higher LTV.
The Required Waiting Period
One thing you must know about taking cash out of your investment home is that lenders require a waiting period. You must wait six months from the time that you purchase the home to tap into the home’s equity.
You probably think this isn’t a big deal since most people wouldn’t refinance before six months anyway, but it’s a different story with investment homes. Many people buy run down homes as an investment. They put the time and money in to fix the home up and then they want to tap into the home’s equity to take the cash out of it to further their real estate portfolio. You’ll have to wait six months after purchasing the home to do this, though.
Qualifying for the Cash-Out Loan
Here’s where things get stricter. Because you have two risks at play here, an investment property and a cash-out refinance, lenders have strict guidelines:
- High credit score – You’ll typically need a credit score around 700 if you want to take cash out of an investment property
- Good debt ratio – Conventional loans have low debt ratio requirements in order to lower the risk of default. Most lenders allow a 28% housing ratio and a maximum 36% total debt ratio.
- Adequate reserves – In order to lower the risk of default on your cash-out investment property loan, lenders require that you have reserves on hand. Exactly how much you will need depends on the loan amount and your credit score, but expect to need between 2 months and 12 months of mortgage payments on hand.
What happens if you don’t qualify for a conventional loan for a cash-out refinance on your investment property? While you can’t turn to government-backed loans with more flexible requirements, you can turn to subprime loans.
Don’t let the name subprime loan scare you. These lenders have alternative options for people just like you. Unlike conventional loans, there aren’t guidelines that fit all loans. Each lender can set their own requirements since they keep your loan on their own books – they don’t have to answer to any investors. This often means less strict guidelines.
We recommend shopping around with a few lenders. Get quotes for a conventional loan, but also see what other lenders have to offer as well. You may be surprised to find that the subprime loans are more affordable than you thought.
Delayed Financing Options
There is one exception to the Fannie Mae/Freddie Mac rule requiring you to wait six months to refinance. If you bought your investment home with cash, but now want to tap into the equity to either fix up the home or buy another home, you can do so days after buying the home – you don’t have to wait six months.
As long as you can prove that you paid cash for the home from your own funds and that you didn’t use any type of financing, you can get a cash-out loan as soon as you want. This allows you to free up some of your cash in order to further your investment.
The bottom line is that you can get access to your equity in an investment home. Whether you put a lot of money down on a home to buy it or you fix up the home and it increases in value quickly, you can get access to it after just six months as long as you qualify for the loan.