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Updated 4 months ago, 08/16/2024
What is better when it comes to a loan for STR, MTR, 2nd home/vacation home?
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.
- Jay Hurst
Hi Ruth,
For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.
Best, Stacy
Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.
- Jay Hurst
Hey Ruth,
What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it.
You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.
- Erik Estrada
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- 818-269-7983
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Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
Sharing an article published just last year on BP on this exact question:
Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?
https://www.biggerpockets.com/blog/short-term-rental-loans-a...
High Level -
-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market
-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)
- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences
There isn't a "best" option. There are different products for different buyer situations. Conventional is always going to be the cheapest, but sometimes it doesn't work due to a buyer's financial situation or their desire to keep a property out of their personal name.
- Corby Goade
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.
Thank you. I can qualify but looking at all options to see what is best.
Quote from @Ruth Schrader-Grace:
Thank you. I can qualify but looking at all options to see what is best.
In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.
- Jay Hurst
Quote from @Stacy Patel:
Hi Ruth,
For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.
Best, Stacy
The only thing I'm concerned about is the prepayment penalties with rates coming down. Not sure getting locked into 1-3 years is the best choice.
Quote from @Erik Estrada:
Hey Ruth,
What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it.
You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.
I definitely agree with that.
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:
Thank you. I can qualify but looking at all options to see what is best.
In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.
Correct although I do despise all that paperwork but we're talking money here so...
Quote from @Robin Simon:
Quote from @Ruth Schrader-Grace:
It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?
Sharing an article published just last year on BP on this exact question:
Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?
https://www.biggerpockets.com/blog/short-term-rental-loans-a...
High Level -
-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market
-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)
- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences
Yes, thank you. There are rules to abide by.
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:
Thank you. I can qualify but looking at all options to see what is best.
In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.
I agree, DSCR is the best option because it is flexible, but you can always work with someone who can evaluate your situation to find the best option FOR YOU.