What Are the Steps to Refinance a Rental Property?

Reasons to refinance a rental property

There are several reasons why someone may want to refinance a rental property mortgage. Many people may refinance to get a lower interest rate loan. Others may want to get cash out of their equity or change their mortgage and payment terms.

It's a good idea to have a clear idea of why you want to refinance. "Mortgages aren't one-size-fits-all, so understanding exactly what you intend to get out of the refinance will make the decision much easier," said Brian Shahwan, licensed broker with William Raveis Mortgage, part of the Melissa Cohn Group. "Those looking to save on their monthly payments would need to compare their current rate to today's rate."

Refinancing may be a good idea for getting cash to do home renovations. "Another reason may be to do upgrades on the property or pay off existing debts using equity," Shahwan said. Ultimately, your goals and needs will influence the type of loan you choose.

» MORE: Types of mortgage loans

How to refinance a rental property

Refinancing a mortgage for a rental property is similar to refinancing a home loan. When you’re ready to refinance, these are the steps.

Check your eligibility

Before you begin looking at lenders and refinancing options, make sure that you qualify for refinancing. Check your credit score and see if it's in line with credit score ranges for the loan you want, the amount of equity in your home and your debt-to-income ratio.

» LEARN: What is a good debt-to-income ratio for a mortgage?

Check your equity

Have your property appraised so you know its current market value. Then, compare it to what you still owe on your loan, which is the equity. Home equity is the current home value minus what you still owe on the loan. Typically, you need to have 20-25% equity in your home to refinance. Lenders prefer borrowers who have more equity in a rental property, as they're considered higher-risk loans.

Gather documentation

Gather documentation to show your financial circumstances so loan officers have an ample understanding of your economic situation.

Typically, lenders want to see the last six months of pay stubs or documents. Also be prepared to show your previous year's tax returns.

• Proof of income including W-2s or 1099s, if you're self-employed
• Proof of homeowners insurance, such as a bill or another document that proves your home is covered
• Financial documents, including bank statements and retirement accounts
• Tax returns
• Credit score
• Property deeds
• Rental agreements
• Current mortgage statement

Compare rates and lenders

When you're considering refinancing a rental property loan, it's a good idea to speak with multiple lenders from various companies. Compare rates and read reviews to have an idea of the current market and get the best deal. Lenders are obligated to provide a loan estimate three days after you submit your loan application. The estimate will contain estimated closing costs, payments and details of the loan terms.

Lock in your rate

Once you turn in your documentation, a lender will review your application, and if approved, they will provide an offer. If you like the offer, consider locking in your rate to avoid increases before you close. A rate lock can usually be done for 30-60 days and in some cases, longer.

Close on your new loan

Once a lender has given the green light on your application and you've agreed on a rate, you'll meet with the lender. This is when you review and sign the final contract and pay closing costs. Make sure you properly read the contract and the fine print to understand what you're agreeing to.

Can you refinance a rental property with bad credit?

Refinancing a rental property with bad credit is possible. Be prepared to have higher interest rates than someone with better credit. It's worthwhile to speak with loan officers to see if there are ways to improve your credit score before refinancing.

"If someone has bad credit and wants to refinance, speaking with a loan officer may be a great step," said Shahwan. "Depending on the reason the credit is ‘bad’ – whether low score, collection accounts, late payments, etc. — there may still be great options for them to consider."

Credit bureaus can also offer guidance on improving credit scores. "You would be surprised at how much valuable information is available online directly from the credit bureaus that can help people fix their credit on their own, and a lot quicker than they imagine," said Shmuel Shayowitz, president and chief lending officer at Approved Funding.

How to speed up the refinance loan process

If you want to speed up the process of refinancing a loan, there are some things you can do.  Have all required documentation prepared and ready for loan officers. Make sure to respond quickly to any questions a loan officer may have to expedite the process.

Bottom line

Refinancing a rental property mortgage may be a good option depending on your situation and goals. Refinancing provides the opportunity to reduce interest rates and payment terms, allowing you to save money and potentially pay your loan faster.