Can You Refinance a Home After You’ve Moved Out of It?

Yes, you can refinance a home after you’ve moved out of it. But it’s likely more complicated and costly than when you’re still in residence.

That’s because moving out changes your status. When you first applied, you did so as an owner-occupier. And that earned you certain privileges, such as a small down payment and a low mortgage rate.

Highlights

• You can refinance a home after moving out, but it’s generally more expensive and involves stricter requirements than refinancing as an owner-occupier.
• If the property is classified as a second home, you’ll face higher rates and lower loan-to-value limits and must meet specific occupancy rules.
• Refinancing an investment property, especially for a cash-out, is even more costly due to increased fees, higher interest rates, and stricter lending standards.
• Lenders may require significant equity and financial reserves, and your credit score heavily impacts refinancing costs.
• Despite the challenges, refinancing after moving out is possible, and careful planning can help you secure a more favorable deal.

Why Is It Different When You Refinance A Home After Moving Out?

When you move out, you cease to be an owner-occupier. You still own the place, but you no longer occupy it.

It’s rare for that to bother your current lender as long as you’ve lived there for 12 months.

But when you refinance, you’re getting a whole new mortgage. And, since you won’t be occupying the home, the house will no longer be owner-occupied.

Instead, you’ll be applying for a mortgage for a second home if you’ll be living there for a portion of each year. Or, if you’re renting out the home over the long term, you’ll need an investment property mortgage.

And both of these mean higher rates, lower loan-to-value maximums, and stricter underwriting criteria. So, if you can plan ahead, refinance while you’re still in residence.

Second Home: Disadvantages Of A Refinance After You’ve Moved Out

What happens if you want to refinance a home after moving out but treat it as a second home rather than an investment property? Well, life is probably a little easier than if you were renting it out to long-term tenants. 

In this article, we’re talking about conventional loans, which are mostly branded as Fannie Mae or Freddie Mac. Fannie’s and Freddie’s rules are nearly identical because they fall under the same regulator. However, those for government-backed loans (FHA, VA or USDA) differ.

Fannie says you must occupy the property for part of each year for it to count as a second home. It’s fine if it’s a short-term vacation rental or an Airbnb for most of the year, but you’ll have to be in residence there some of the time.

Fannie Mae lays out its second home requirements for its conventional loans. And you can probably assume that other types of conventional (not government-backed) mortgages and lenders have similar rules. 

In addition to your having to occupy it for part of each year, the home must be:

• A one-unit dwelling
• Not “subject to any agreements that give a management firm control over the occupancy of the property”
• Suitable for year-round occupancy
• Not a rental property. Or, rather, you can’t count any rent as part of your income when you apply
• Not a timeshare

Assuming you meet those requirements, Fannie would require a minimum equity in the property of 25% after a cash-out refinance. For example, a $300,000 home is eligible for a loan of up to $225,000 after any cash is taken.

If you’re refinancing to a lower rate or monthly payment with little or no cash taken out, that figure is 10%. For an owner-occupier wanting a purchase mortgage, Fannie’s normal minimum equity position for owner-occupier home buyers is 3-5%.

You’ll have to fund the difference if you don’t have enough “equity” (the amount by which your home’s value exceeds your mortgage balance).

For a cash-out refinance on a second home with a remaining equity of 25%, Fannie/Freddie would also add 2.125% of the loan to your fees – equating to a 0.5-1.5% higher rate. This is called a loan-level price adjustment (LLPA).

Similar Drawbacks For An Investment Home Refinance

If you’re not the owner-occupier and you can’t show that the property is a second home, Fannie will count it as an investment property. So, there’s no list of requirements for this category. 

For a cash-out refinance, Fannie will want a minimum of 25% equity in a single-family dwelling or 30% in a multi-family dwelling comprising two to four units.  

If you’re taking little (maybe just for closing costs) or no cash out, 25% may suffice regardless of whether it’s a single- or multi-family dwelling.

While Fannie sets these minimum rules, lenders are generally wary of mortgages on investment homes and can insist on their own higher standards. 

They know that if times get tough, landlords tend to prioritize keeping their own homes and might allow rental-property mortgages to fail. That means they want plenty of financial cushioning. Some aren’t keen to lend to inexperienced landlords at all.

So, while you could get an investment home cash-out refinance with a credit score of 620, that may be difficult in practice. The lender would charge you a much higher mortgage rate than someone with a 720 one. 

Fannie wants to add a whopping 4.875% of the loan amount to your fees if your score is below 639 and you have equity between 25% and 30%. Think $4,875 in extra costs for every $100,000 borrowed. That compares with $875 for each $100k for someone with stellar credit.

These are in addition to the 2.125% in loan fees for a cash-out refinance on an investment property. 

Even with a great credit score, you’re looking at around $9,000 in extra fees on a $300,000 refinance or a 2-3% higher interest rate – or a mix of both – just because you’re not living there.

Add those to current mortgage rates, and you can see that this isn’t going to be cheap for anyone, let alone a financially challenged applicant. 

Meanwhile, your lender could demand yet more. And, indeed, it might not be interested in lending to you at all. 

Nevertheless, You Can Refinance A Home After You’ve Moved Out!

All that sounds pretty scary and expensive. But people become landlords every day. 

And many carry out refinances later. You just have to be sure that your rental revenue and other income comfortably cover your higher outflow. 

Still, your profitability figures will improve if you can refinance as an owner-occupier. 

Too late? Then, invest time and effort in building your credit score and cash reserves—lenders like landlords to have three to six months of mortgage payments in a savings account.

Oh, and don’t forget to shop around plenty of lenders to find your lowest rate and closing costs. Their quotes can vary wildly.

Just remember, the better shape your finances are in when you apply, the better deal you’re likely to get. With that in mind, you can refinance a home after you’ve moved out and still benefit.