Loan Officer Training - 01/02/2025 - Mastering Short-term Rental Property Loans

In this episode of Loan Officer Training, we’re unlocking the secrets to Short-Term Rental Property Loans—one of the hottest opportunities in real estate lending! 🏡✨ Learn how to navigate the unique requirements of financing vacation rentals, Airbnb properties, and other short-term investments.

We’ll cover everything from qualifying borrowers to understanding income projections and market trends. Plus, discover expert tips to help you position yourself as the go-to loan officer for clients in this lucrative niche. Don’t miss this chance to expand your knowledge and grow your business! 🎧💼

Ready to master short-term rental loans? Tune in now! 🚀

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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acc...

Transcript

Restream recording Jan 02, 2025 • 05:03:50 PM: 0:13

Now it's very important to note what exactly is a short term rental property, right? Short term rental property is a property that can be legally rented by the day, week, or month. Or month. Now it is very important to note that do not confuse short term rental properties. With condo hotels. Now, condo hotels are usually going to be short terminal properties, but, uh, they tend to be much more restrictive, right? Um, condo hotels usually have a deed restrictions. Not all of them, not going to say a hundred percent of them do, but most of them have deed restrictions, which is going, which are going to prevent how often the, um, Owner can occupy the property. In some cases, it'll state that they can't occupy it for more than six months in a calendar year. Other times it may state can't occupy for more than 30 days continuous, whatever the deed restrictions may be, they are going to vary. And sometimes the restriction is actually from the city. City. If the property is deemed a condo hotel, uh, like in Sunny Isles, Florida, for example. So do be aware that, um, not, not all short term rental properties are condo hotels. If you do have one that is a condo hotel, then you need to review those guidelines specifically. To see what you can do in light of what we're going to discuss now in our presentation. Um, now a short term on a property is usually not going to have any type of a lease except for maybe a property management lease. Um, be aware this may present. Some issues in the structure of your loan after you review, after you review the guidelines, because, uh, unleased properties may have LTV restrictions. And in some cases, for example, if it's, uh, a refinance, May not be possible to do at all, so I, I can't really generalize all guidelines as one, but I am pointing out what the, um, you know, obstacles may be, uh, if it, if it is a short term on a property. We're not going to have a lease. Now, again, this is when it is a purchase, excuse me, backwards. This is usually an issue when it's a refinance and not a purchase, because when it is a purchase. The property can be vacant, right? It's not yet owned by the borrower. And I'm going to touch base on that in a minute regarding structuring your short term rental property loan, but let me cover this other, um, uh, two important bullet points here. Please be aware that most guidelines do not allow short term rental income for, uh, properties. With 5 or more units, right? Usually those are going to be long term rent only. So do be aware if you have somebody that has a 5 plus unit property. And, uh, they're looking to do short term rental. You may want to just qualify that then as a long term rent. Uh, but again, where it poses the more, uh, bigger issue is if the, if it's a refinance and they're currently already operating it as a short term rental, you may have issues. being able to qualify the borrower. So you'd have to look far and deep to try to get somebody to approve that if they're doing short term rentals. Now, be aware that when you have a purchase, right, just because the borrower is telling you, Hey, I'm going to operate it as a short term rental does not necessarily mean that you have to submit. The loan using short term rental income, because remember if they are purchasing the property and especially, let's say for example, if there's a current tenant in place with a lease, then they're not going to kick that tenant out anytime soon. So we would just use the long term rent. Um, even if the property was vacant, if the property qualifies using long term rent, and it is a purchase, then use long term rent. Even, you know, it doesn't matter what the borrower says they're going to do with the property. If it's a purchase and it qualifies with long term rent, then we can qualify the borrower, borrower using long term rent. Then after they close, they decide they're not going to, uh, qualify with, uh, if they decide they're not going to use, uh, you know, operate it as a long term rental, but they're going to operate it as a short term rental, that's their prerogative to do so. Uh, so you do not necessarily have to qualify the borrower with short term rental income. If it is a purchase, because the reason I say that is because in many cases, there are loan level price adjustments for, um, using short term rental income versus long term, uh, some cases it's going to be an LTV adjustment, you know, maybe though, like in some cases, it's a maximum 75%. LTV on a DSCR loan, uh, if you're using long term rent, excuse me, if you're using short term rent. As opposed to long term rent, or they may in other cases say, Hey, it's a 5 percent reduction from the maximum allowed by the program. So if that borrower's credit score, uh, would have only qualified them for 70 percent maximum, and you're using short term rent, then it could be then 65%. Now, again, don't generalize across the board on all guidelines. Uh, that is only, um, you, you have to read the specific guidelines because they all change. They're all different from option to option, but do be aware that it is not a requirement to use short term rental if, you know, if they say that's what they plan on doing with the property, if it's a purchase. And the property is vacant. If it's leased already, then, you know, you're going to use a long term rent, but if it's vacant, then see what the options are, uh, with long term rent, because besides the LTV adjustments, there's also loan level price adjustments and the loan level price adjustment in some cases may be as high as two or two and a half points add on to the cost of the rate. When using short term rent, or in some cases they may say when using air DNA, right, as opposed to, uh, as opposed to using a 10 or seven with short term rental comps, so to be aware, you know, you could have again, LTV hits or pricing hits if using short term rental income. So. Uh, let's get into some of the potential issues that I touched on right now, you know, you know, to formalize what are the issues. So again, first issue here is that the property may be considered a vacant property, right? Like I was just mentioning, and if it's considered a vacant property because it's no lease on the property, then you're going to reduce LTV. on refinance transactions and actually will reduce LTV on purchase transactions as well if it turns out that they are using short term rental income to qualify. Now obviously the only the if the long term rent doesn't qualify you and you need The short term rent from, uh, income from a short term rental 1007 or from AirDNA, you know, that would be one reason to do it, but as you're going to note a little bit further down the page, we can always go no ratio or low ratio on a DSCR. And still qualify the borrower in most cases up to 75 percent LTV with a pretty good rate. So again, bullet point number 2, which I already covered using short term rental income may result in an LTV reduction using bullet point number 3 using short term rental income may result in pricing adjustments. Right. So we, we covered those and I gave you more or less the real world example of why, you know, how you could structure your deal with long term rent if it qualifies. Right. So. Scarcity of short term rental comps could be another issue if the, uh, because if it's a purchase, you have three ways to qualify that borrower, uh, if they're going to use short term rent, if it's absolutely necessary to use short term rental income because the borrower does not qualify using the long term rent. And this may happen because the typically properties that are being operated. As a successful short term rental property, you're going to have a higher cost than a property being operated as a long term rent. So, in that case, you may not, the borrower may not qualify with. Long, uh, long term rent and then, you know, you're, you're reaching out for a short term rental 1007 and the appraiser says, you know, there are no short term rent comps around here. So then you could use their DNA, right? Air DNA is a database. It's a, it's an Airbnb database, but it's a database. Of short term rental properties, so the, uh, the appraiser would log into air DNA similar as they would log into the NMLS. Excuse me, into the MLS, the multiple listing service, to look for comparable, uh, sales or comparable rentals. Well, in this case, if it's short term rent, they're gonna log in to AirDNA. They're gonna look. For similar, because, you know, you can't compare, uh, the subject property, which is a four bedroom, two bath to an eight bedroom property. So it has to be similar style of property, similar size, bedroom count. Proximity, you know, all the things that you worry about with regular comps when you're looking for, let's say, rental or sales comps, it's going to be the same similar, you know, gross living area, similar bedroom and bath count, similar neighborhood, all that kind of stuff needs to line up so that the comparable from your DNA is acceptable. However, one very important point to note is that when using AirDNA, besides the fact that you may have a loan level price adjustment or, uh, or an LTB adjustment, uh, the guidelines are usually going to state that a minimum occupancy level has to be met. So AirDNA, when it generates the report, will generate income, right? Projected income for the property and will also generate a projected occupancy level for the area. In some cases, it has to be at least 50 percent. In other cases, it has to be at least 60, six zero percent. So please do review the specific guidelines for the option chosen to make sure that you meet all of the requirements. Um, one other important note, uh, when using short term rental income and especially, uh, when using AirDNA. Is that it may require a higher minimum DSCR for a purchase. In some cases, I've seen the DSCR have to be 1. 5 when using short term rental and or when using AirDNA. So do review the guidelines. Again, we cannot generalize here across the board because each guideline is specific. to that investor. So do review it and make sure that you're not missing any important points. Uh, now one other potential issue, uh, when using short term rental income is investor experience. Now you will note in most cases for a regular DSCR loan, Investor experience is something that needs to be taken into consideration, right? In most cases, they're going to require either investor experience, or they're going to require the borrower at least have a primary residence that they own, or that the borrower have at least a, uh, Primary housing expense. Right. So those are all things to consider and there may be more again, because I'm just touching on certain other points from different guidelines that I have seen, because again, there is not one guideline that we use across the board for the situation. So. And, uh, one in particular, I can recall, which is a great option for short term rentals, uh, will not accept a borrower using short term rental income if that borrower does not have any experience with short term rental property. So not necessarily just investor. Experience, but investor experience with short managing short term rental properties because they are a totally different ballgame. And like I mentioned, when using short term rental income, there may be a requirement. Of a higher minimum DSCR for this particular option. I was mentioning it's 1. 5 minimum on a purchase Uh when using short term rental income, so they'll give it to you, but you got to jump through extra hoops of fire So I I did touch base Uh now i'm going to expand on it here And you know using DSCR loans in general to qualify the the borrower, uh using long term rent Instead of short term rent. So, you know, it's going to be pretty easy if you have a projected long term rent income, or if it's currently rented would be even better, but you know, typically the borrowers real estate agent, if this is a purchase, can provide rental comps for the area. And if you get some rental comps, then you can confirm that your DSCR is at least 1. 0 or above. Awesome. Cool. That's not a problem when it is a purchase. Now when it is a refi, we do have a couple options where they're just going to ask us for any of the three. Either a 1007, be it long term rent or short term rent. Or a lease or a short term rental revenue reports for the last 12 months or, you know, or so if any of these factors that you have, um, would work, that's acceptable and obviously the, the best option would be that the long term rent in the area covers. And we get a 10 0 7 with long-term rent that covers at at least a 1.0 or above, then we're good to go. We don't have to worry about anything. We, and, and, and again, this is one particular option that we have. This is not all options. This is one of our particular investors that is going to ask either for a 10 0 7, whether it be short term or long term, or a lease or, um. It's pretty much either or the revenue reports. If it's, if it's a seller and the seller is currently operating as a long term rent, a short term rent, or if the borrower, if it's a refinance, they're currently operating it as a short term rent and they have at least the last 12 months revenue reports, we can use that. Now that's a little bit different from some of the other options that if it's a refi, they may ask you for a lease or not. And this particular option, they don't ask us for a lease. So you don't have it leased. It's not a problem. That's that one particular investor. Most of the other ones are going to ask for a lease if the property is, uh, currently owned, if it's a refund, but going back to the longterm rent, if it's 1. 0 or above, that's great. You know, we can do 80 percent and in some cases we can even do 85%, right. Depending on a credit score, the borrower and all that kind of good stuff. And if it qualifies as a longterm rent. That's amazing. Then 85 percent LTV on a purchase. Good to go. If the DSCR is less than one again, we do have options for 0. 75 to 0. 99 and options less than 0. 75, usually up to 75 percent LTV. This is as an alternative of having to use short term rental income on purchases and even in some cases on refis. Right. Where you may have loan level price adjustments, LTV hits, and when the dust settles, after you do the math, you may realize that you're going to get better pricing possibly without the short term rental loan level price adjustment. So again, do be aware of all the different ins and outs of the, um, guidelines for DSCR loans, because like I mentioned, some options let you use just the 1007 or the lease. Or the short term rental income, so don't fall into the trap of thinking you don't you have to use, you know, short term rent if they're either going to operate it as a short term rent property, or if they are purchasing it, or they're currently operating it as a short term, right? So if it's if it's a purchase. You definitely have more options. If it's a refi, you still have some options. You just have to know how to properly structure the loan. And in some cases, we actually have refis that will let you use their DNA, short term rent, if the property was just put into service on a refi. Right, so that's another interesting example. If you need short term rental income, obviously, if the property is vacant and that particular investor doesn't let you submit vacant property, then they won't consider it vacant. If it's a short term rent, but then you have the other guideline. So I've covered quite a bit of material here. Um, we have very good DSCR options and wanting to see if we have any questions on dealing with short term rental properties financing for either a purchase or a refinance. You gotta have a question or two out there. I'll give it another minute. All right, well, short term rental properties are again, you guys saw the explosive growth that they have had. There's a lot of them out there. It's a great niche to work. Not very many people understand the ins and outs on financing short term rental properties and all the flexibility that we have with all the different programs that we have that already are used to short term rental properties and have. Well, And have, uh, updated their guidelines to reflect, uh, working with short term rental properties. So, no questions today. So, I do thank you for being on today's training. And I look forward to seeing you next Thursday. Thank you and have a great day. Oh, wait. Uh, okay. No, uh, no questions. All right. Thank you, everybody. Have a great day. Wait a minute. I do see a question here. I don't know what happened with my visual, but I will answer your questions for, for the DSCR monthly. Okay. For the DSCR, the monthly or higher. Is that because of the multiple units? Uh, okay. I'm not sure, Nico, if I understand the question for the DSCR, the monthly or higher. No, that's not, you're making an assumption there, Nico. I guess you're talking about, are you talking about the monthly payments are higher? I mean, a DSCR property can be one to four units or five plus units. So I'm not pretty sure if I understand the question. And all right, that seems to be it. Thank you all and I look forward to seeing you next Thursday in the next training.