How & Where to get the best AirBnB mortgage for vacation rental investment property

[AJ Wong]

In today's real estate investment market the mortgage matters. 

For those not purchasing with cash, assessing income or cash flow can often come down to the terms of the mortgage financing for an AirBNB or Vacation rental. 

The 'right' AirBNB mortgage and mortgage lender can often be the difference in making a deal incentivizing enough to invest now.

The first step to qualifying for any mortgage boils down to: Cash, Credit & Collateral. Ability to pay, do they pay, have they saved? Mortgage lenders are increasingly creative in how they underwrite borrower income for vacation rental or properties intended to be AirBnB's. Some will even allow AirDNA projections (usually with 25-30% down) as the rental income for DSCR (debt service coverage ratio) for investment properties as qualifying income.

More standard income variations are: asset depletion (using reserve distributions as the proposed income) or average personal or business bank statement deposits over a 12-24-36 month period. 

Some examples of strategies and mortgage options that can enhance investment are:

- Check with a local credit union to join. They often have member incentives at considerably lower terms than 'market.' 

- Interest only or extended amortization (For example a 10/20 Interest only or 40 year amortization). This type of loan product generally will not be available with a conventional local credit union. Usually income will have to work at the fully amortized (principal + interest) rate. 

- Lower down payment programs. The availability has recently been more restrictive but some lenders were/are offering lower down payments for investment properties. In early 2022 I was working with a lender/broker that was offering 10% down on investment properties of 1-4 units, more recently some examples include 15-20% down on investment properties and 10% down on a Jumbo exception second home purchase. 

- Investor incentives. As a mortgage professional for twenty plus years, I can share that the mortgage market is similar to other competitive industries. I receive countless emails from lenders daily with their rate sheets and promotions for specific borrower or property types, geographical areas or loan types. Often a seasoned mortgage professional or broker will know where to take the borrower profile at the right time. Some examples include if borrowers deposit the first three moths into a checking account with the bank they will reduce the qualifying rate by .25% 

- Assumable mortgages. Popular theme that can be difficult to execute however increasingly there are borrowers with pandemic era mortgages that are selling and the mortgage can essentially transfer (be assumed) by the next owner. The main challenge is that the properties have often appreciated significantly and in order to assume the loan borrowers will need to come up with the difference between the sales price and existing mortgage balance at closing. So for example a $600k purchase with a $350k mortgage balance @ 3.25% is attractive but the borrower would need to have at least $250k down (plus closing costs) available for the down payment. 

- Cash to cash out. For borrowers with higher reserve allocations, they could consider making a cash offer and coordinating a cash out refinance at a later date. This can be advantageous in making offers to purchase more competitive, allow buyers to be more aggressive with purchase price and reduce closings costs. Many lenders will require seasoning (ownership interest) for a minimum of 6-12 months to utilize a new appraised value, but many will permit a cash out refinance using the purchase price anytime after closing. For investment properties expect a maximum LTV of 70-80%. Rates can be slightly higher for cash out refinances vs purchases but costs can be lower.

- HELOC or Second mortgage. For those with an existing property portfolio, leveraging existing assets or equity can be a worthwhile consideration. Combining primary mortgages (on a subject acquisition) with a fixed second mortgage (against another property) can reduce the loan to value (LTV) on the qualifying mortgage; which should provide lower interest rates and make the offer to purchase more competitive (since there is a larger down payment.) Some lenders have limits on the maximum loan amount of a fixed second mortgage or HELOC between $250-500k although many have unlimited cash in hand but still based on the loan to value. Expect max combined LTV's (First mortgage plus second) on primary homes in the 90%+/- range and on investment properties expect 75-85% LTV.

- Realtor Referrals. The majority of buyers consider a lender recommended by their RE broker that they are familiar with. As both a licensed Real Estate and Mortgage broker I always try to provide my client with at least one lender appropriate for the clients investment purposes and recommend they check in with their current local banking relationship (if from out of the area) for reference. 

- Pre Approvals & Loan Commitments. Usually primary vacation rentals eligible for AirBNB or nightly vacation rental usage are highly competitive. Some mortgage lenders offer TBD underwritten approval letters (one-tier above PreQualification) that can help distinguish offers to purchase. Increasingly some lenders will go a step further and commit to a 24hour loan commitment once an executed offer is received. This provides reassurance to sellers and sellers brokers that the client is fully qualified and can close expeditiously within 10-14 days.