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How To Refinance A Multi-Unit Home

10-Minute Read
Published on May 30, 2019
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Multi-unit homes provide a great opportunity for you to earn passive income regardless of whether it’s your primary property or purely an investment property. As with any home though, it’s not a matter of buy it and forget about it. Whether you want to get into a lower mortgage rate or convert your equity into cash to do home improvements, there are lots of reasons you might apply to refinance.

Below is everything you need to know in order to refinance your multi-unit home, starting with the basics.

Reasons For Refinancing A Multi-Unit Home

The reasons for refinancing a multi-unit home are the same as the reasons you might refinance a single-family property: to take cash out, lower your rate and/or payment, or change your term.

One of the main reasons people refinance a multi-unit property is that they’re landlords, which often makes them responsible for most if not all of the maintenance. More units mean more work that needs to be done. With that in mind, you might utilize your existing equity to take cash out of the property.

You can also use your multi-unit home to help you consolidate your debt. Even if it’s an investment property, the interest rate you get on a mortgage should be lower than any interest rate you get with a credit card or personal loan. You can take the cash out by converting your home value and paying off your existing debts at a much lower interest rate.

Requirements For Refinancing A Multi-Unit Home

The requirements for refinancing a multi-unit home depend on the purpose of the loan. Several factors are also taken into account, including your existing equity and credit as well as your debt-to-income ratio (DTI), as described below.

Loan-to-Value Ratio

In order to take cash out or do a typical rate/term refinance, you usually need some amount of equity. This is measured by lenders in terms of your loan-to-value ratio (LTV).

You can think of LTV as the reverse of the amount of equity you have. For example, if you paid off 30% of your existing mortgage, you would have an LTV of 70%.

There are exceptions to the rule on equity if you happen to owe more than your home is worth, which is detailed in a later section. For the next few sections, the requirements discussed assume you have at least some equity in your home.

Conventional Loans

Conventional loans are offered through Fannie Mae or Freddie Mac. The amount of equity you need to refinance depends on both the loan purpose and the number of units you have. Fannie Mae and Freddie Mac also have slightly different requirements, but your Home Loan Expert can match you with the program that works best for your situation and goals.

If you have a two-unit primary property, you can do a refinance to lower your rate or change your term with as little as 15% equity, or an LTV of 85%. If you have three or four units, at least 20% equity is required to do a rate/term refinance.

If you’re looking to do a cash-out refi on a primary property, you’ll need at least 25% equity, or a 75% LTV, to refinance a multi-unit primary residence.

Conventional loans are also the only ones you can use on a property that’s strictly a rental, meaning you don’t live in one of the units. In this case, you need at least 25% equity in order to lower your rate or change your term.

If you’re looking to get a cash-out refinance with Fannie Mae or Freddie Mac on a multi-unit investment property, you’ll need an LTV no higher than 70%, meaning you have to leave at least 30% equity in your home after taking the cash out.

FHA Loans

At Quicken Loans, you can get an FHA loan for up to a two-unit primary property, meaning you live in one unit and rent out the other. If you’re looking to get a rate/term refinance on a two-unit primary property, you can have up to a maximum LTV of 96.5%, meaning 3.5% equity. If you have a median FICO® score of 620 or higher, you’ll only need 2.25% equity.

If you’re looking to take cash out, you can leave as little as 15% equity in your home. Note that if you’re going to take cash out, you need a median credit score of 620 or higher.

VA Loans

If you’re getting a VA loan, qualifying active-duty service members, reservists, veterans and surviving spouses are able to do a rate/term refinance into a VA loan for up to the full value of the home.

If you’re looking to take cash out, you’re able to pull all of the equity out of your home and convert it into cash at Quicken Loans as long as you have a median FICO® score of 680 or higher. If your score is lower than that, you may still be able to take cash out with a FICO® score as low as 620, but you need to leave at least 10% equity in your home (90% LTV).

Credit Score

When qualifying for a mortgage, your credit score is one piece of a two-sided credit coin.

For the purposes of this section, the credit scores we mention will be based on a formula used by FICO®. There are others, but using some version of the FICO® formula is the industry standard. But note that lenders will get your score from all three of the major bureaus – Equifax, Experian and TransUnion – and take the median score for loan qualification purposes. Every minimum score mentioned in this section will be the minimum median (or middle) score among the three bureaus.

Conventional Loans

Fannie Mae and Freddie Mac make the initial credit score required for refinancing any number of units fairly straightforward. You need a credit score of at least 620.

The one caveat here is that you need a 720 minimum FICO® if you own seven or more properties financed by a mortgage or another instrument. There are certain properties that don’t count, including properties that aren’t financed, vacant land, properties with five or more units, and commercial real estate. If you’re refinancing your primary residence, the number of properties you own doesn’t matter.

FHA Loans

If you’re looking to refinance an FHA loan, you can do so with a credit score as low as 580, but only for rate/term transactions. You also have to keep a fairly low DTI.

If you’re looking to take cash out on a two-unit property, you’ll need a credit score of at least 620. One of the advantages of refinancing with an FHA loan is that you can qualify to refinance with a slightly higher DTI than you could with many other loan options, which can provide you with more financial flexibility to take cash out or lower your rate and change your term as long as you have a 620 credit score.

VA Loans

While the VA doesn’t set minimum credit score requirements, lenders do set their own policies. For a regular VA loan of less than $484,350, the minimum FICO® score is 620 at Quicken Loans to do a rate/term refinance or take cash out for up to four units.

If you’re getting a VA-backed jumbo loan, you need a minimum median score of 640. At Quicken Loans, VA jumbo loans are defined as those loan amounts greater than $484,350 but less than $1.5 million. The VA doesn’t set limits on the amount lenders can approve, but they limit the amount the lender gets back from insurance policies in the event that you default. Accordingly, lenders set their own policies based on their appetite for risk.

Finally, if you’re looking to convert all of your existing equity into cash, we require a 680 median credit score. If you have less than a 680 median score, you’ll have to leave at least 10% equity in the home at the close of your cash-out transaction.

Debt-to-Income Ratio

Your DTI measures how much of your monthly income goes toward paying off existing revolving and installment debts. These include things like your mortgage, car payment and personal loans, but also payments for revolving lines like credit cards.

For example, say you have annual income of $60,000. You have a house payment of $1,200 per month, a car payment of $350 and monthly credit card balances totaling $300.

Your monthly income would be $5,000. Therefore, your DTI on a monthly basis would be 37% ($1,850/$5,000). Occasionally, you may need to have what’s referred to as a front-end ratio that’s lower than a certain amount. A front-end ratio is calculated the same way DTI would be, but without the house payment included.

The rest of this section will go over DTI and, where necessary, front-end ratio requirements.

Conventional Loans

If you’re refinancing into a conventional loan, the requirements vary some between Fannie Mae and Freddie Mac. Your Home Loan Expert can help find the best option for your situation.

For Fannie Mae, the general guideline is that your monthly DTI can’t be over 50%. Freddie Mac makes individual judgments based on factors like LTV and credit score, among others.

FHA Loans

If you’re looking to do an FHA loan, in order to do a rate/term refinance with a score of between 580 and 619, you need to have a front-end ratio – this is your DTI without your house payment – of no higher than 38%. Your DTI when everything is included can’t be higher than 45%.

For those with credit scores of 620 or higher, most times it’s an individual judgment based on a variety of factors, including the above-mentioned LTV and credit score.

VA Loans

For VA loans, the maximum DTI for most refinances is based on whether the interest rate on your new loan is fixed or adjustable. If you have a fixed-rate loan, the maximum DTI can be up to 60%. If you have an ARM, your DTI can be no higher than 50%.

These standards apply to both regular and jumbo VA loans.

Income And Assets

You have to make enough income to be able to comfortably make your mortgage payment every month. However, you’re also required to have a certain amount of qualifying assets. These cover a certain number of monthly mortgage payments in case you have a loss of income or a large bill that’s unexpected. Any required reserves (or documented savings) are measured in months of mortgage payments.

Conventional Loans

If it’s a primary residence, you’ll need 6 months of full mortgage payments (principal, interest, taxes, homeowners insurance and any applicable homeowners association dues) if the investor is Fannie Mae. Freddie Mac makes decisions on the amount of assets you need on a case-by-case basis.

For investment properties, Fannie Mae requires a percentage of the principal balance in reserves. This varies depending on the number of properties you own. For Freddie Mac, decisions are again made on a case-by-case basis.

FHA Loans

In terms of reserve requirements for an FHA loan, you may need up to 3 months’ worth of full mortgage payments, but this isn’t the case for everyone. In short, expect these reserve requirements to apply depending on your DTI at credit scores below 620.

VA Loans

If you’re using rental income to qualify to refinance a particular property, you need 3 months’ worth of payments if the rental income isn’t coming from the property being refinanced. It would be 6 months if the rental income were coming from the subject property.

If there’s no rental income involved in qualification, there are circumstances in which two months’ worth of payments may be required, but it depends on your situation.

What About Jumbo Loans?

There are specific requirements in all these categories if you’re getting a regular jumbo loan as well.

Speak with a Home Loan Expert for details, as jumbo loans have varying requirements based on loan amount for everything covered in this section, and there are a lot of variations. Our experts can go over your unique situation and make appropriate recommendations.

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Can I Refinance My Multi-Unit Home If I Owe More Than It’s Worth?

The options above are for refinancing your loan when you have at least some amount of equity built up. But what happens if your home has lost value since your last purchase or refinance?

Your mortgage options may be limited because you won’t be able to switch mortgage investors (e.g., from FHA to conventional), but you may be able to take advantage of lower rates and shorter terms by doing what’s often referred to as a Streamline refinance with your current mortgage investor.

Conventional Loan

If you owe more than the value of your property on an existing conventional loan, you may be able to refinance your loan no matter how much you owe if it’s a fixed mortgage and with an LTV up to 105% if you have an ARM.

You do need to keep your DTI between 45% and 55% depending on your situation. There are other requirements that will apply as well, so you’ll want to speak with an expert about all of your options.

FHA Loans

If you have an existing FHA loan, you can get a Streamline even if you owe more than your home is worth. The LTV is unlimited. You just have to follow standard DTI requirements.

For clients currently serviced by Quicken Loans, we can help you with a Streamline if your credit score is as low as 580. Non-serviced clients switching from other lenders will need a 640 credit score.

VA Loans

If you have an existing VA loan where the value of the property has fallen, you’re allowed to refinance up to 120% of the property’s value with a VA Streamline.

Clients serviced by Quicken Loans will need a 620 credit score to take full advantage of the relaxed LTV requirements. Those coming from other lenders will need a median 700 FICO® score. Standard DTI requirements may apply.

What If I Have Lower Credit And Want To Refinance?

If you have less-than-perfect credit and are looking to refinance to lower your rate or change your term, you can qualify to get a new loan on up to a two-unit home through the FHA with Quicken Loans.

Refinancing options on multi-unit homes for all other loan types and purposes will require a 620 credit score. Obviously, the higher your credit score, the better. It will open you up to better terms for financing.

If your score isn’t quite where you need it to be at the moment, we recommend checking out our friends at Rocket HQSM, where you can sign up to get your VantageScore 3.0® credit score and report each week.1 In addition to monitoring your progress, you can also get personalized tips on how you can improve your score to get you on the path to accomplishing your goals.

If you’re ready to refinance your multi-unit home, you can get started online or give us a call at (800) 769-6133.

1Quicken Loans® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.