Ok. I’m going to go out on a limb here and say that someone reading this post has, at one point in his/her life, taken an Uber to an AirBnB. It makes sense and it’s a perfect exemplification of the “gig economy” working in both housing and transportation. Take a car you don’t own to stay in a play you don’t own, yet efficiently meet the needs of your travel and lodging.
What about the other side of the equation? Let’s say you’re the owner of the property that you list on a short-term rental website? And let’s go a step beyond and say that you make a practice of renting your property such that it generates a quantifiable amount of income each year? Can you use this income to qualify for a mortgage?
Let’s first paint rental income in some broad strokes. We’ll come back to some of these later so it’s important to understand how the mortgage industry treats rental income in general.
- Rental income almost always needs to be generated by an investment home. This means the subject cannot be a primary residence or a true second/vacation home. In cases where the property is a multi-unit (duplex, triplex, 4-unit), it is acceptable if one of the units is a primary residence while the other(s) is rented.
- Rental income, for the vast majority of mortgage qualifications, requires a one-year lease agreement in place. Yes, the lease may have converted to month-to-month after the first year, but lenders are looking for stability and they largely define that as a 1-year lease to start.
- Guidelines will vary depending on whether the borrower is purchasing or refinancing, so in the latter case, demonstrating rental income on a property by way of a two-year tax return history can go a long way towards establishing stable and usable income.
- Boarder income (rooms rented within what is usually a single family residence, or SFR) is not generally allowed as qualifying income with a few exceptions. If you think you may have such a situation, let me know and we’ll discuss in detail.
Off We Go!
I realize that some “vacation” rentals are just that. Stunning locations, resort-like amenities, etc. But what about the very “workmanlike” accessory unit (aka, “ADU”) on your primary home that you’ve consistently rented out over the last few years? Sure, you’ve never had a long-term tenant or lease, but thanks to technology, you’ve been able to keep the unit rented for a majority of days in the year. Here, we’re going to assume our borrower is looking to refinance and use the income generated by the short-term rental to help with the qualification. Let’s again go to the numbers:
- If this property is your primary home AND it’s a single-family residence AND the accessory is legally permitted AND you have a two-year rental history per your tax filings, it’s likely you can use this income to qualify. On a purchase, a rental survey would be used to determine the market rents. On a refinance, the owner’s tax returns would show the historical rental income/loss.
- If you do not claim rental income on your tax returns, you cannot use it to qualify, even if you have the rental receipts to show you’re renting the property. An exception here might be a bank statement or investor loan that does not require tax returns.
- If the home in question happens to already be your vacation residence, you cannot refinance it as a second/vacation home and use rental income from it. Vacation residences cannot claim rental income per the definition of their occupancy status.
The Devil in the Details
As you can see above, the underwriting attitude surrounding short-term rental income is more favorable than it was in the past. The trend is good. But if you’re going to make a case for using short-term rental income (AirBnB, VRBO, etc.) from a property you own, your best bet is to have a 2-year history of declaring the income on your tax returns. It’s further helpful to have all of your service provider receipts for the renting of the property. Last but not least, your property must be legally able to be rented both per the terms of your existing or new financing and by any ordinances in the town where the property is located. With the above, we are available to help with an understanding of what’s possible in terms of your mortgage goals, so get in touch any time.
Senior Vice President of Mortgage Lending
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