Mortgage refinance rules for primary residences are more flexible

For those trying to cash in on great For those trying to cash in on great deals in the 2013 housing market, owning two homes can be tricky. Refinancing a non-primary house can get expensive. Photo Credit: AP, 2006

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Buying a house is an attractive proposition in these days of low mortgage interest rates and fallen prices. But if you want to buy a new home, while renting out the old one, you could face a glitch. It might be hard to refinance a house that you're renting out.

That's because "things change when you're no longer dealing with a primary residence," warns Ben Chenault Jr., regional manager at Fairway Independent Mortgage in Birmingham, Ala.

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    "A lot of people want to jump on the great deals, but they still have their current home and don't want to wait for that home to sell," Chenault says. "They think, 'Aha! The rental market is good; I'll just rent it out.' But what if someone stops paying the rent? Are you sunk? If the answer is yes, you probably shouldn't do it."

    Let's suppose, for the sake of discussion, that you've already done it. Now you own two houses -- one that you occupy, and one that you don't. To cut monthly interest expense, you want to refinance the house you're renting out. It might not be easy.

    Often, equity is the biggest hurdle in the effort to refinance a house you're renting out. Lenders typically require a cushion of 25 percent or more to refinance a loan secured by a non-owner-occupied house, says Stephen LaDue, a senior loan officer at Prime Lending in Brookfield, Wis. The reason: An owner who has a substantial stake in the property is less likely to default.

    "If you're upside-down or have a minimal investment, you might walk away," LaDue observes.

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    Some lenders might be flexible about credit scores, income and cash reserves, but that 75 percent maximum loan-to-value ratio is usually a "hard and fast rule," Chenault adds.

    A second mortgage on the rental house will make refinancing difficult because that lender probably won't agree to remain in the lesser position if the first loan is refinanced.