Buying a home to rent on Airbnb

In this article:

Can you get a mortgage for an Airbnb rental home? In many cases, yes! You can finance an Airbnb rental home under several programs:

1. Use any traditional mortgage if you don’t need the rental income to qualify
2. Finance a home as an investment property and use the comparable rent on the appraisal to qualify
3. Choose one of the growing number of niche short-term rental loans to buy your Airbnb

In addition, Fannie Mae allows you to use Airbnb income to qualify for a home refinance.

Short-term rentals, long-term plans

Today, it’s tempting to buy home and rent it out using services like Airbnb, VRBO or HomeAway. Consider that, currently, there are almost 5 million Airbnb listings. Over 300 million guests have stayed at an Airbnb property. And the average income for an Airbnb host is $924 a month.

But getting a mortgage for a short-term rental property can be tricky. That’s because you may need a different kind of loan if you don’t plan to live at the home.

If it will be your permanent residence, it won’t necessarily be easy finding an agreeable lender either. But it is possible.

Think about how you plan to use your home as a rental property. Then, explore your financing choices. There are more lenders and funding options available today for Airbnb hosts than ever before. But restrictions apply.

Loan option #1

The first financing option for buyers who want to live in the property but host short-term renters is to pursue a traditional mortgage for a primary residence. Most “regular” lenders use the Uniform Residential Loan Application (Form 1003) to qualify borrowers for loans.

On the form, you must indicate how you will use the property: as a primary residence, second home or investment property. If you select “primary residence,” you must intend to live in the home and must in most cases move in within 60 days of closing.

When you buy and finance a primary residence, you don’t get to use the potential rental income to qualify for your mortgage.

Is it a primary residence?

Home usage is not always a constant thing, and there is no law against buying a primary residence and converting to a rental when you move away. There is nothing fraudulent about bringing in a roommate to help make the payments. But you can’t go into a transaction intending to commit what’s called “occupancy fraud.”

“Some borrowers try to get around this,” says Suzanne Hollander, real estate attorney and Florida International University instructor. “They live in the home while also renting out individual rooms. Or they rent out the entire home when they’re away for an extended period, yet they can prove they use their home as their only primary residence.”

Also, “Many buyers think they know how much a short-term rental will generate in annual income, “Hollander says. “But a lender will normally not lend on projected income for a rental investment property. A lender wants to see at least two years of rental income on that property. They want to be sure the borrower can repay the loan.”

Better to be upfront with the lender. Ask about loan programs available for a primary residence that you intend to rent out short-term. One easy solution is to buy a multi-unit home like a duplex, triplex or four-plex, live in one unit and rent the others. That is perfectly okay, even for an FHA loan with 3,5 percent down.

Loan option #2

A second funding option is an investment property loan. An investment property is a home that you won’t use as your primary residence. These loans are commonly available to owners seeking to use the property exclusively for renting.

The caveat here? It’s harder to qualify for this type of loan. Plus, you’ll pay more for the loan via a higher interest rate, closing costs, and down payment.

“Normally, this loan requires at least a 20 percent down payment,” says Hollander. “That’s because there’s a higher risk you’ll default on a property that’s not owner-occupied.”

Note that mortgage insurance is not available for investment properties. That’s why the minimum down payment amount is so high. In addition, many lenders require:

• an LTV ratio of at least 80%
• a credit score of 740 or higher
• six months of “liquid reserves” (cash, or assets that can be easily converted to cash).

Your lender will probably require an appraisal with a rental schedule, indicating what income the property would likely generate. If it already has tenants, you may be able to get away with merely providing copies of the leases and proof of the income.

Otherwise, find out if the home you want to buy was previously used as a rental home. “If it was, during the due diligence period, request that the seller provides documentation of prior rental income earned by the previous owner. Present this information to your lender,” says Hollander.

Loan option #3

As a third option, check out a private loan—often called a “hard money” loan. This means financing offered by a private investor/lender. It may be easier to qualify for this type of loan, but it could be costlier.

“Hard money loans typically require a down payment of 25 to 30 percent. Interest rates are in the range of 8 to 10 percent in many markets,” says Jeffrey Hensel with North Coast Financial. The good news? “They have very few requirements,” he adds. “Loan requests are often approved and funded quickly.”

Loan option #4

A fourth choice requires patience. With this option, you get an owner-occupied mortgage that allows you to rent out to Airbnb guests. Host these short-term rentals for at least a year. This builds the proof of income you’ll report on at least one tax return.

Then, try refinancing your mortgage via Fannie Mae’s new Airbnb refi initiative. This program allows you to use home sharing income to help qualify for a refi. And if you’re able to refinance at a lower interest rate, that could lower your mortgage payments.

Other matters to ponder

Before pursuing financing or committing to short-term renting, consider these tips:

Check that renting your home is allowed.

“Some properties, like condos, have rules that prohibit short-term rentals. The condo association may impose fines and penalties on owners who do so,” Hollander cautions. Also, “some cities have regulations that prohibit short-term rentals of single-family homes.” Inquire with your municipality first.

Prepare for extra costs.

“Some cities require buyers to obtain a short-term rental license. They may also require the installation of special safety and fire equipment,” she says. Plus, guests cause wear and tear and damage. “Set aside a slush fund of money for needed maintenance and repairs,” she adds.

Expect rental fluctuations.

“It’s important to understand the seasonality of short-term rentals. Demand can increase or fall. You may get most of your income from only a handful of rental months,” says Hensel.

Learn how it affects your taxes.

“Owners of a primary residence that’s used for short-term rentals may lose their homestead tax exemption. That could result in a large property tax increase,” Hollander notes.