Cash Out Refi-LTV on a rental property vrs owner occupied

[Mario Morales]

If you own a 2-flat with an additional non-conforming garden unit (basement) being rented, and you're considering a cash-out refinance, how will the lender evaluate the rental income? Specifically:

• Will the lender only consider the rental income from the two legally zoned units, even though all three rental incomes are declared on your tax return?
• Will they base their calculations solely on the income from the two legal units and disregard the non-conforming basement?

Additionally:

1. What is the current loan-to-value (LTV) ratio for rental properties?
2. If the property were owner-occupied, would I only receive credit for one rental unit's income, while the non-conforming basement income wouldn't count?

From my understanding, it might be more advantageous to refinance as a rental property at a lower LTV with income from two units, rather than as owner-occupied at a higher LTV with only one rental income considered. Does this make sense?

[Caleb Marks]

This will depend on what kind of loan you choose to proceed with. Speaking from my experience with DSCR loans, most lenders will look at this deal as a 2-unit and qualify the income from only the 2 legally zoned units. Additionally, they will likely ask that the appraiser not consider the third unit which is not legally zoned in the valuation. This way the lender is covered and only lending on the value that is legally zoned and compliant (in case the city took action against the non-conforming unit). There is also a distinction to make here as units can be legal non-conforming aka grandfathered in, in which case the above scenario would be ok to consider rental income and value on all three units.

Currently, the maximum LTV for a cash-out refinance on a 2-4 unit property is 75% LTV, some lenders can go up to 80% on a case-by-case basis but qualifications are much more strict (FICO, DSCR, Property Type, Market, etc.).. but it can be done.