Moving out of your home can make it more challenging to refinance your mortgage for multiple reasons. First, when you move out, your home is no longer your primary residence. When you refinance the mortgage on a home you no longer live in, the loan is classified as a non-owner occupied mortgage.
The terms for a non-owner occupied loan are different than for a mortgage on your primary home. You are required to pay a higher mortgage rate, which increases your monthly payment and potentially reduces the loan amount you can afford.
You are also required to have more equity in your home to qualify for the refinance. If you are not taking any cash out, the maximum loan-to-value (LTV) ratio for a refinance on your primary residence is 97% as compared to 90% for a second or vacation home and 75% for a property that you no longer live in and rent out.
Applying a lower LTV ratio for a non-owner occupied mortgage reduces the loan amount you are eligible for and may make it impossible to refinance. For example, if your property is valued at $200,000 and your existing mortgage balance is $170,000, your LTV ratio is 85%, which is above the maximum 75% LTV ratio limit for a non-owner occupied loan.
In this scenario, you cannot refinance the mortgage if you move out of your home because you do not have enough equity in the property. In this case, you are better off refinancing while you live in the property because you are eligible for a higher LTV ratio and therefore a higher loan amount.
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The second point to keep in mind if you want to refinance the mortgage on a home you no longer live in is that the monthly housing expense -- either the mortgage or rent payment -- for both that property and your primary residence is included in your debt-to-income ratio. This means that you need to earn enough income to afford the housing expense for two homes instead of only one, which can make it much more challenging to qualify for the refinance.
For example, if the mortgage, property tax and homeowners insurance on the home you moved out of is $4,000 and those costs are $4,500 for the home you currently live in, the lender includes $9,500 in your debt-to-income ratio to determine the mortgage you can afford. If you refinanced your mortgage before you move out, you are only responsible for the expense for one home and the lender only includes $4,000 in your debt-to-income ratio. The lower your monthly debt payments, the higher the mortgage you can qualify for.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your income and debt payments
You may be able to use rental income from the property you moved out of to offset the higher debt expense but the amount of income included in your application may be limited depending on how long you have received the income or how much property management experience you have.
In closing, it is usually easier and less expensive to refinance the mortgage on a home you live in. If you are considering moving out of your home and are also contemplating refinancing, you are probably better off staying put until after you refinance.
"B2-1.1-01, Occupancy Types." Selling Guide: Fannie Mae Single Family. Fannie Mae, May 1 2019. Web.« Return to Q&A Home About the author