First Attempt to Refinance My First Rental Property: Advice?

Question

I have a duplex that I originally purchased with a VA loan, and I moved out of my unit to finish rehab and moved into a SFH live-in-and-BRRRR. Like pretty much everything, its value has gone up, and based on comparables, I'm estimating its value at up to$275k in Chattanooga. My current lender has said I'd need to get a commercial loan (I've started to look for other lenders).

First, is this commercial loan correct? If not, what type of loan would I be looking for? The numbers, as I see them:

At a $275,000 value, I used a 75% LTV, so $206,250, and I would hope to find a lender willing to see the remaining 25% as my equity. I currently owe $149,000, so a cash-out of $57,250.

I currently pay $977/mth: $645.05 for principal and ESCROW is $331.57 (taxes and insurance/no PMI).

Using the Bankrate calculator, a new loan at $275k and 3.1% would be $1,165/mth (approximates, of course):

• $918 principal and interest
• $66 Insurance
• $181 property tax

Anything that I'm missing or should be considering here?

Jeff Shumway · Answer

Hey Rik, if you no longer live in the property 75% LTV is probably the best you will find especially on a multi. The VA loan is unique in that it does finance up to 100% LTV on the cash out refinance but you must be living in the property in order to make that work. If you are no longer living in the property and you have it rented out, it is considered an investment property. Investment properties come with more stringent LTV requirements than a primary residence because there is a greater risk for default on an investment property.

I'm not sure why your lender stated you need a commercial loan. Are you trying to close in a business entity?  You could possibly do it as just a conventional loan if you are closing in your personal name.

Reid Chauvin · Answer

You should be able to get a cash-out refinance on this loan, but if you do not live in the property then it will be considered an investment property. Max LTV for multi-unit investment property is 70%. Also, your interest rate on a multi-unit investment property is more likely to be closer to 4% than 3% right now. Your lender should be able to run an estimate for you pretty easily to help you decide if a cash-out refi truly makes sense.

Rik Hunter · Answer

@Stephen E. Not a bad idea, but it's rented out.

Rik Hunter · Answer

@Garvin Watson That's great advice. I'm in my second property, a SFH, and used a VA loan for it. Refinancing the duplex might make sense simply because I'd have it under a non-VA loan and could then go buy a new second home using another VA loan.

Stephen E. · Answer

Is it possible for you to move back into the property for a little while and refi as a commercial loan? Seems like it would really be worth your while.

Garvin Watson · Answer

@Rik Hunter I too am a veteran with a similar situation. Since you're only using a portion of your VA loan on your current residence. You should be able to use something called the VA bonus entitlement. If you reside in your current resident for over a year you can use the remainder of your entitlement on your second property with zero out-of-pocket cost as long as you don't exceed your VA limit for your county (Chattanooga $548,250). Call the VA 1800 number or log into your VA Ebenefits account and request a copy of your COI. Provide the COI to your qualifying lender and they will determine your down payment if any. Good Luck.

Joe Splitrock · Answer

@Rik Hunter the product you are looking for is a non owner occupied conventional loan. As others said, that will be 30% LTV and higher interest rate. You get two dings on the interest rate. Rates are higher for non-owner occupied and higher for cash out. My guess is that commercial will be a higher interest rate and you are looking at 20 year amortization with 5 year lock as typical.

Brad L. · Answer

Some banks don't offer secondary market loans on investment property, or even retail portfolio loans. I'm guessing that's why this lender told you you'd have to go commercial. Specific bank policy as opposed to what you can actually do elsewhere.

Rik Hunter · Answer

@Reid Chauvin Just a follow-up on the term. Are these always limited to 15-yrs? (And Navy Federal surprised with going up to 95% LTV.)

Rik Hunter · Answer

@Reid Chauvin thank you! That was helpful, and I'm finding the roughly 4% rates.

First Attempt to Refinance My First Rental Property: Advice?

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