If your credit score is 720 or higher, the reserve requirement for a cash out refinance on an investment property is six months of total monthly housing expense including your mortgage payment, property tax, homeowners insurance and homeowners association (HOA) dues, if applicable. If your credit score is less than 720 and your debt-to-income ratio is greater than 36%, the reserve requirement may be up to twelve months.
Acceptable sources of funds to meet the reserve requirement including the following:
bank accounts including savings and checking accounts
investment and brokerage accounts with liquid assets such as stocks and bonds
the vested portion of a savings account
the cash portion of a vested life insurance policy
Please note that the proceeds from the cash out refinance cannot be used to meet the reserve requirements.
Another point to consider is that if you own other properties that are financed with a mortgage, you may need to hold additional reserves. The additional reserve requirement depends on the number of properties you own, as outlined below:
Own one to four properties: 2% of the combined outstanding principal mortgage balance
Own five to six properties: 4% of the combined outstanding principal mortgage balance
Own seven to ten properties: 6% of the combined outstanding principal mortgage balance
The total outstanding principal mortgage balance referenced above also includes any home equity loans and lines of credit (HELOCs) on the properties. The total balance used to calculate the reserve requirement, however, excludes the mortgage on your primary residence and the investment property being financed.
For example, if you own a total of six properties comprised of the investment property you are taking cash out of, your primary residence and four other investment properties, the additional reserve requirement is 4% of the total outstanding mortgage balance on the four investment properties.
So if the total monthly housing expense for the property you are doing the cash out refinance on is $4,000 and the combined outstanding mortgage balance on the four other investment properties is $1,000,000, your total reserve requirement is as follows (assuming you have a 720 credit score):
Investment property being financed: $4,000 (total monthly housing expense) x 6 months (reserves) = $24,000
Other four investment properties: $1,000,000 (combined mortgage balance) x 4% (reserves) = $40,000
Total reserve requirement: $64,000
To reiterate, although your primary residence is included in the number of properties you own, the mortgage on that home is not factored into the reserve requirement.
To summarize, the reserve requirement for a cash out refinance on an investment property is six or twelve months of total monthly housing expense, depending on your credit score. You may also be required to hold additional reserves if you own other investment properties or a second home.
The table below shows investment property mortgage terms. We recommend you contact multiple lenders to confirm the reserve requirements and to find the best loan terms.
"B3-4.1-01, Minimum Reserve Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.