Many people who own investment properties don’t believe they can refinance their rentals due to equity (or lack thereof) . Since rental property loans require 25% equity on a traditional Fannie Mae or Freddie Mac loan, I understand why so many landlords do not attempt to refinance.
Landlords also believe that many of government programs, such as HARP (Home Affordable Refinance Program) offered exclusively for homeowners are not for investment properties. Well, I have some news for you landlords, not only can you do a HARP refinance on a rental property, they are PERFECT for rental properties. Let me explain.
When HARP was first released, it had similar risk-based pricing that regular conventional loans had. Many homeowners were discouraged to find out they qualified for HARP but the new higher credit requirements for conventional loans made these loans too expensive. Homeowners would hear about 4.5% 30 year interest rates but were often offered 6%+ rates.
The government then implemented an adjustment cap to help homeowners who had these lower credit requirements. This cap was equivalent to about .5% to the homeowners interest rate, meaning if 30 year fixed HARP loans were at 4.5%, everybody who qualified for HARP would only pay 5% or less depending on their qualifications. It was a noble cause to make sure all homeowners could get a decent rate.
However, this is what makes HARP perfect for landlords. HARP doesn’t have special guidelines for rental properties, meaning lenders who offer 105% of a homeowners value on a primary residence usually offer the same limit on investment properties! Also, the .5% cap for HARP loans applies to all HARP loans. This means landlords can refinance their investment properties at .5% above the best HARP rates regardless of credit, property type or equity! This is, of course, as long as they are still within HARP guidelines. I believe it’s probably an oversight, as I doubt the purpose of this cap was to offer amazing rates to property investors.
Today, I helped a homeowner who had two rental properties lock interest rates for their house and their two rentals. The rates we locked were 4.5% (owner-occupied 4.6% APR), 4.875% (Fannie Mae backed rental 4.995% APR) and 4.875% (Freddie Mac backed rental 5.007% APR). None of the properties had more than 10% equity and one of the rentals was near 100% of the value! What was the client’s credentials? Well, if the credentials weren’t perfect, he may have had to pay a higher rate on his primary residence but it would’ve bared no change to his rental property rates. Crazy, isn’t it?
If you have a rental property you’re trying to refinance, check to see if it’s owned by Fannie Mae or Freddie Mac. If it is an d you’re paying more than 5.5%, then call your loan officer and lower that rate. How often does the government help you improve your cash flow?
TIP FOR FREDDIE MAC INVESTMENT LOANS
Some of you have read my posts on HARP and realize that HARP is a product you can apply for with your current lender but can also apply with outside lenders.
Freddie Mac has a version of HARP for your current lender that is different than the version for outside Freddie Mac lenders. If you have converted a primary residence into a rental, your current lender CANNOT do a HARP loan for you but you CAN get this done with an outside Freddie Mac lender. I’ve confirmed this with several lenders. A few veteran loan officers at banks may have access to the outside-Freddie Mac version of HARP and still help but not often. If you have a primary residence converted to a rental property and have a Freddie Mac loan, look for a Freddie Mac lender who can help you.
UPDATE March 11, 2012:
The government extended the HARP deadline from June 30th, 2011 until June 30th, 2012. I hope they modify the program to help more homeowners but if they do look into modifying the program, there’s a chance they may change the price cap that helps rental property loans price so well on HARP. I would recommend refinancing your HARP eligible rentals as soon as possible.
HARP 2.0 will improve the price adjustment for Fannie Mae investment properties since the fee cap will be lowered. Freddie Mac is keeping their fee cap the same for investment properties, only improving the cost for non-investment HARP loans.
For homeowners looking for more information on getting approved for a Freddie Mac HARP investment loan, please read this post: