The Challenges of Refinancing Your Residential Real Estate Property
March 4, 2013
In recent years, many people have entered the residential rental property business. Some did so out of economic necessity due to a forced move, while others wanted to get in on the relatively high rate of rental offered by the rental housing market. Now, with mortgage rates continuing to decline, many of these rental property owners are considering refinancing their mortgages on these properties. Refinancing might not be as easy as they might have believed, according to a Bankrate.com report.
The first hurdle a rental property owner might face is outright rejection of the financing application. Lenders generally demand a larger amount of equity in a rental home before offering to refinance than they do with a primary residence. With rental real estate, many banks require 25 percent equity, or more, according to Stephen LaDue, a senior loan officer with Texas-based lender Prime Lending. Banks fear that owners with little equity or who owe more than the property is worth are more likely to simply abandon the property and default on the mortgage if times get tight, LaDue explained to Bankrate. While owners might find lenders willing to compromise on other criteria, the equity standard is a “hard and fast rule,” according to Ben Chenault Jr., a regional manager at Wisconsin-based Fairway Independent Mortgage.
Also, if you own multiple mortgaged houses for the purpose of renting them out, other restrictions may block your path. Most lenders do not permit a single borrower to hold more than four mortgages on residential properties. Lenders do this in order to prevent investors from buying up too many houses, and leave too few for consumers seeking to own and occupy.
Even if you enough equity, and own few enough properties, you may still face serious roadblocks. If you have an existing second mortgage on the property you’re renting, this likely complicates matters further. In order to refinance in these situations, the lender who issued your second mortgage must agree to remain in the inferior position in terms of priority. Most lenders will not agree to resubordinate, which creates an impasse that stymies the refinancing.
Some owners seek to evade these hurdles by refinancing before they move out. Owners should be careful in attempting this maneuver, though, because of the potential for a claim of loan fraud. Homeowners must sign an affidavit stating that they intend to occupy the property. Many lenders use a “one-year” basis for intent to occupy, but this is not a bright-line rule. “You could intend (to live there,) and then get a job transfer or find out your wife is pregnant and want to move and upgrade to a bigger house. That gets into a gray area,” Gary Parkes, a former mortgage loan officer for Acopia Home Loans, explained to Bankrate.
Rental real estate can provide a lucrative source of supplemental income, but it is not without its own unique set of challenges and complications. For the best legal advice about your residential rental property ventures, consult the real estate attorneys at Samuel C. Berger, P.C. Our New York and New Jersey real estate attorneys can provide you with thoughtful opinions and well-crafted plans to maximize the usefulness of your rental properties and minimize the headaches. Contact us online or call (201) 587-1500 or (212) 380-8117.
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