MTR Income Loan Qualification

[Jerome Morelos]

Hello BP, what are the lender requirements for Mid-Term Rental income? I started my MTR in Sept 2023 and some lenders I've spoken to are saying different things such as 1 year tax returns, 2 years tax returns.. Can't I provide Airbnb/VRBO Income reports to prove this? This is the only thing holding me back from getting pre-qualified for another property. 

[AJ Exner]

Jerome,

Yes, there are some lenders that would take ABNB/VRBO income reports to show income, but there are alot that don’t. How many months of trailing income can you show? 

Some would take those, 1007 market rents, or even AirDNA, so knowing which ones is important as you start your refinance(?, I’m guessing) 

Good luck! Happy to connect if you are still needing help

[Jerome Morelos]

I can provide 12 months worth of income reports. Most of my bookings are from Airbnb (only 2 guests outside of Airbnb)

[Erik Estrada]

Quote from @Jerome Morelos:

Hello BP, what are the lender requirements for Mid-Term Rental income? I started my MTR in Sept 2023 and some lenders I've spoken to are saying different things such as 1 year tax returns, 2 years tax returns.. Can't I provide Airbnb/VRBO Income reports to prove this? This is the only thing holding me back from getting pre-qualified for another property. 

 Hey Jerome, 

This highly depends on the type of loan. It sounds like you are running into hurdles with conventional financing. 

On DSCR loan, lenders will qualify you based on short term or long term rents. No tax returns are needed to qualify for this loan, however the monthly rent must cover the full PITI mortgage payment.

[Erik Estrada]

Quote from @Erik Estrada:

Quote from @Jerome Morelos:

Hello BP, what are the lender requirements for Mid-Term Rental income? I started my MTR in Sept 2023 and some lenders I've spoken to are saying different things such as 1 year tax returns, 2 years tax returns.. Can't I provide Airbnb/VRBO Income reports to prove this? This is the only thing holding me back from getting pre-qualified for another property. 

 Hey Jerome, 

This highly depends on the type of loan. It sounds like you are running into hurdles with conventional financing. 

On DSCR loan, lenders will qualify you based on short term or long term rents. No tax returns are needed to qualify for this loan, however the monthly rent must cover the full PITI mortgage payment.

On a Short Term Rental DSCR loan you can provide Airbnb/VBRO income for the past 12 months to support the short term income. If it is less than 12 months, lenders will use 75-80% of AirDnA projected rent or order a short term rent appraisal report.

[Robin Simon]

Quote from @Jerome Morelos:

Hello BP, what are the lender requirements for Mid-Term Rental income? I started my MTR in Sept 2023 and some lenders I've spoken to are saying different things such as 1 year tax returns, 2 years tax returns.. Can't I provide Airbnb/VRBO Income reports to prove this? This is the only thing holding me back from getting pre-qualified for another property. 

 Hi Jerome - MTR is certainly one of the areas of lending that is still new and lenders are still adapting - probably going to run into trouble with more traditional and conventional lenders - which generally take a long time (years) to adapt to new trends like this

I wrote about this late last year as one of the developments to watch for 2024 - particularly how DSCR Lenders are approaching, which is likely the best bet for this investment type currently (but note not all DSCR Lenders are the same - so will need to vet and pick one that is MTR friendly and generally forward-thinking)

What’s Next For DSCR Loans? Updates For 2024 and Beyond

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

Now, we will go over what’s next in DSCR loans—an overview of what innovations or additions to the DSCR loan product lineup may come in 2024, as well as the next evolution of this revolutionary loan product.

Medium-Term Rentals

One of the biggest developments in real estate investing in 2023 has been the rise of medium-term rentals. The medium-term rental (sometimes referred to as mid-term rental) is an investing strategy that combines elements of short-term rentals and long-term rentals.

Investing in medium-term rentals, which are typically defined as tenants renting properties for more than 30 days but less than a year, has become a preferred strategy of many investors. The seminal book on the strategy, 30-Day Stay, published here on BiggerPockets and written by MTR pioneering investors Sarah Weaver and Zeona McIntyre, has helped popularize the method.

Real estate investors are attracted to medium-term rentals to gain the benefits of extra cash flow versus long-term rentals while avoiding regulatory risks, high turnover, and intensive management of short-term rentals.

While many investors are now turning to medium-term rentals to build their portfolios, the lending world has unfortunately been a little slow to keep up. Over the last couple of years, many DSCR lenders have embraced and adapted to financing short-term rentals, including using data-driven tools like AirDNA to qualify rents on short-term rental properties, but there is yet to be a similar tool for medium-term rentals.

Many investors use a general rule of thumb for midterm rentals that they should earn about 50% more in rents than an equivalent long-term rental (whereas short-term rentals should earn double or 100% more than if the property was utilized as a long-term rental).

However, for DSCR lenders, change can be slow and challenging, and many lenders prefer and require more precise qualification measures than rules of thumb. Thus, the next challenge and frontier for many DSCR lenders seeking to serve the growing number of real estate investors pursuing this strategy is to cement a qualification and underwriting methodology to properly qualify MTRs and accurately project their revenues.

Potential next steps would be for a data provider to emerge similar to AirDNA for medium-term rentals to take on this growing opportunity. Until then, DSCR lenders will have to be creative and flexible to tap this growing market.

[Matthew Crivelli]

Quote from @Jerome Morelos:

Hello BP, what are the lender requirements for Mid-Term Rental income? I started my MTR in Sept 2023 and some lenders I've spoken to are saying different things such as 1 year tax returns, 2 years tax returns.. Can't I provide Airbnb/VRBO Income reports to prove this? This is the only thing holding me back from getting pre-qualified for another property. 

You're best bet is to use a DSCR loan and purchase the property vacant. Most DSCR lenders will use long term market rent to qualify the loan. I do realize that in some cases the LT market rent can't support cashflow after paying for PITI but in cases where it does, this is an option. 

[Derek Brickley]

Hey Jerome,

From our conversations, on a conventional primary residence loan without tax returns you wouldn't be able to use this as additional income. For your property now, this would only be able to offset the current payment from your DTI ratio. If you're able to get those items over before our call tomorrow we can go through and run more numbers based on offsetting that payment.

DSCR is always a possibility for a new home, but it would not have the benefits of a primary residence lending option (terms and down payment).

[Jerome Morelos]

Thanks for the responses guys. I'm unfamiliar with DSCR loans but seems like something I'd be interested in using in the future. For now, I'm planning to use an owner occupied loan.

[Jerome Morelos]

Quote from @Derek Brickley:

Hey Jerome,

From our conversations, on a conventional primary residence loan without tax returns you wouldn't be able to use this as additional income. For your property now, this would only be able to offset the current payment from your DTI ratio. If you're able to get those items over before our call tomorrow we can go through and run more numbers based on offsetting that payment.

DSCR is always a possibility for a new home, but it would not have the benefits of a primary residence lending option (terms and down payment).

Yes working on it, however, I’m starting to think I should wait until it’s filed in my taxes before I even start looking for another property. That extra buying power will give me a better chance of finding a property within the area I’m looking in. What do you think? 

[Derek Brickley]

Quote from @Jerome Morelos:

Quote from @Derek Brickley:

Hey Jerome,

From our conversations, on a conventional primary residence loan without tax returns you wouldn't be able to use this as additional income. For your property now, this would only be able to offset the current payment from your DTI ratio. If you're able to get those items over before our call tomorrow we can go through and run more numbers based on offsetting that payment.

DSCR is always a possibility for a new home, but it would not have the benefits of a primary residence lending option (terms and down payment).

Yes working on it, however, I’m starting to think I should wait until it’s filed in my taxes before I even start looking for another property. That extra buying power will give me a better chance of finding a property within the area I’m looking in. What do you think? 

It would definitely increase your buying power, but hard to say where that is for you at the moment just by offsetting it.  It might make sense to wait, or it might not.

[Stephanie Medellin]

I see a lot of posts mentioning DSCR loans, but if you're buying a primary residence, a DSCR loan cannot be used. DSCR loans are for investment properties only.

For traditional conventional financing, you won't be able to document short term rental income with AirBNB or VRBO reports.  While you could be granted an exception to use a 12-month lease if the property was acquired mid-year, it doesn't sound like you have an annual lease if you rent on a shorter term basis.  

Some lenders will average out a partial year of rental income from your tax returns if you cannot provide a lease.  It will be averaged over 12 months, which will help offset some of the expenses, and may or may not be enough to qualify for another property.  This will depend on the rest of your financial picture.  

Non-QM loans may be an option for you to qualify with short term rental income.  

[Tanner Lewis]

It would probably be the easiest to qualify it as a STR. MTRs can really lean either way, but it really depends on how the leases are structured. Good rule of thumb: <6 month lease = STR, >6 month lease = LTR

[Jerome Morelos]

Quote from @Tanner Lewis:

It would probably be the easiest to qualify it as a STR. MTRs can really lean either way, but it really depends on how the leases are structured. Good rule of thumb: <6 month lease = STR, >6 month lease = LTR

Most of my guests are booked on Airbnb for 30+ days 

[Tanner Lewis]

Quote from @Jerome Morelos:

Quote from @Tanner Lewis:

It would probably be the easiest to qualify it as a STR. MTRs can really lean either way, but it really depends on how the leases are structured. Good rule of thumb: <6 month lease = STR, >6 month lease = LTR

Most of my guests are booked on Airbnb for 30+ days 

That'll be underwritten as an STR then!

[Ashish Acharya]

Lender requirements for Mid-Term Rental (MTR) income vary, with many asking for 1-2 years of tax returns to verify consistent rental income. Some lenders might accept Airbnb/VRBO income reports or bank statements showing rental deposits, but this is less common. It's important to shop around and find a lender that will work with your current documentation. Be prepared to provide alternative proof of income if you don’t yet have the required tax returns.