Converting a second home into an investment property is a big step. The home you've enjoyed for leisure is suddenly a business, with all the benefits and risks of business ownership. Leveraging your credit to finance renovations or to abide by the terms of your current second-home mortgage is a sound business practice that preserves cash flow. A cash-out refinance will pay off your current loan and give you a new first mortgage designed for investment properties.
1. Check your credit report. Review the report for errors and derogatory items such as collection accounts that you can resolve before you apply for the loan.
2. Assess your savings. Lenders prefer that investment borrowers have enough cash reserves to cover their personal and business expenses for at least six months. Save additional funds, if necessary.
3. Decide how you'll use the property. The investment use may be a factor in the type of loan you apply for. An interest-only loan might be appropriate for a flip that you plan to sell quickly, for example, whereas a fixed-rate loan might be a better bet for a rental property.
4. Evaluate how much money you need to meet your business goals and assess the profits you’re likely to earn.
5. Order an appraisal. Tell the appraiser you intend to use the property as an investment. Compare the appraised value to the principal balance of your current loan.
6. Make a lump-sum payment, if necessary, to reduce your loan balance to less than 75 percent of the appraised value. Most lenders require that you have at least 25 percent equity.
7. Research lenders and loan products. Decide on the type of loan you want to apply for. Contact several lenders you'd consider working with to request pre-approvals so that you can compare their rates. Be upfront about the fact that you're financing an investment property.
8. Submit an application for the loan you believe will work best for you.
- You'll probably have to accept a higher interest rate or pay a fee to keep your rate low if your credit score is below 740.
- Your cash reserves should be seasoned funds that have been in your account for at least 60 days before you apply for the loan. The lender may want to "source" your deposits to make sure they're not borrowed or gift money. Be prepared to document where money came from -- a bonus at work, for example, or a tax refund or the sale of personal property.
- Jupiterimages/Comstock/Getty Images