How soon can you do a cash-out refinance on a rental property?
Under Fannie Mae's guide, a borrower generally must have been on title for at least six months before a cash-out refinance, and an existing first mortgage being paid off must be at least 12 months old. There is an exception, called delayed financing, for a property bought with cash within the last six months. Other lenders can set their own waiting periods, so ask yours.
What a cash-out refinance is
A cash-out refinance replaces the loan on a property with a bigger one and pays you the difference in cash. The new loan is larger than the old balance, so your payment and your debt both rise. The cash is borrowed money, not income. For the bookkeeping, see cash-out refinance journal entries.
Example a made-up rental is worth $500,000 and has a $250,000 loan balance. A lender allows a new loan up to 70% of value, which is $350,000. After paying off the $250,000 and, say, $6,000 of closing costs, $94,000 is left in cash ($350,000 less $250,000 less $6,000).
The two timing rules in Fannie Mae's guide
- Time on title: the borrower must have been on title to the property for at least six months before the new loan is funded. The guide lists exceptions, including a property inherited or awarded in a legal action, and time the property was held by an LLC the borrower controls.
- Age of the loan being paid off: an existing first mortgage must be at least 12 months old at the time of the refinance, measured from the old note date to the new one.
These are the rules for loans that Fannie Mae buys. Lenders that keep their own loans, or sell them elsewhere, write their own. Some require more time on title, some less. Ask each lender for its waiting period in writing.
Delayed financing: the cash-purchase exception
If you paid cash for a property in the last six months, Fannie Mae's guide lets you borrow against it without waiting, if all of these hold: the purchase was at arm's length, the settlement statement shows no mortgage was used, the title search shows no liens, and you can document where the purchase money came from. The new loan is limited to what you actually put in plus financed closing costs and fees, so you recover your cash and cannot pull out extra.
Example a made-up buyer pays $300,000 cash for a rental. The new loan is capped at that documented $300,000 plus any closing costs the lender finances. Even if an appraisal says the property is worth $380,000, the buyer cannot borrow against the extra $80,000 under this exception.
What to bring to the lender
- The closing statement from your purchase and proof of where the money came from.
- Current leases, a rent roll and a year of income and expenses (a T12).
- Mortgage statements and the payoff amount.
- Insurance and property tax proof.
The lender will order an appraisal. If it comes in lower than you expected, the cash you can take out shrinks. See how LTV works.
Count the full cost before you borrow
A cash-out loan swaps equity for debt. Before you do it, run the new payment against the rent with DSCR, because a bigger loan can turn a profitable rental into one that loses money each month. Points paid on a rental loan are generally deducted over the life of the loan; see rental loan points.
How DoorKeeping fits
DoorKeeping keeps the loan, the closing costs and the cash out in the property's own books, and produces the rent roll and T12 a lender asks for. It does not arrange loans or advise on whether to borrow. It costs $2 per unit per month.
Sources
Questions
- How long do I have to own a rental before a cash-out refinance?
- Under Fannie Mae's guide, six months on title, with exceptions. Other lenders set their own periods, so ask.
- Is cash from a cash-out refinance taxable?
- Loan proceeds are borrowed money, not income. Interest and costs follow separate rules, so ask your tax preparer.
- What is delayed financing?
- A Fannie Mae exception that lets a cash buyer borrow against a property within six months of buying it, up to the documented cash invested plus financed costs.