If you’ve been renting out your own house or condo via Airbnb, or a similar service like HomeAway or FlipKey, you might have more difficulty securing a mortgage.
This is one of many unintended consequences related to the so-called “Sharing Economy,” whereby individuals turn their homes and cars (and whatever else) into profit drivers.
The same hoopla arose when Uber and Lyft first got started, with insurance companies often balking at drivers who used personal insurance policies to conduct what is seen by some as commercial driving.
With companies like Airbnb, “hosts” are able to rent out their properties whenever they like, whether it’s just when they’re out of town, seasonally, or full-time. It’s supposedly a great way to make some extra cash when you aren’t using your home.
However, the issue that seems to be befuddling mortgage lenders is the occupancy of such a property.
Is It Still Owner-Occupied If It’s Listed on Airbnb or Elsewhere?
You see, mortgage lenders ask how you’ll use your property when extending mortgage financing. After all, they’ve got a huge ownership interest in your home when you take out a massive loan on it.
If it’s simply your primary residence, you are entitled to the most flexible financing options and the lowest interest rates because defaults are lowest on owner-occupied properties.
However, if it’s a second home (which doesn’t allow rentals of any kind) or an investment property, the mortgage financing options become a lot more limited, and the interest rates significantly higher.
This is to account for risk, as history tells us default rates are higher on non-owner occupied properties.
Cumulative losses tied to certain loans issued before the most recent housing crisis were around 14% on owner-occupied homes, and closer to 20% on investment properties. This disparity allows lenders to charge a higher interest rate on the latter property type.
But are Airbnb rentals tied to owner-occupied homes actually investment properties, or something else entirely?
This is what mortgage lenders are reportedly grappling with, seeing that a short-term rental falls somewhere in the middle. Can you really call it an investment property if it’s only rented out two weeks of the year?
Apparently some mortgage lenders don’t have a problem with it, but other major banks do. And you can’t really blame them given the added risk associated with housing complete strangers.
I’ve actually heard of tenants (who don’t own the properties) renting out their rentals on Airbnb and similar websites, unbeknownst to their landlords.
Essentially, renters are making a buck by subleasing their properties on a short-term basis when they go out of town.
Using Airbnb to Pay the Mortgage Down
Ironically enough, I stumbled upon a page on the Airbnb website that was advertising a $200 cash bonus for certain hosts that could be used to “help pay down your mortgage.”
Most folks know you can use rental income to offset a monthly mortgage payment if it’s an investment property, and the same is true with short-term Airbnb rental proceeds.
If the property is a rental property and you treat it as such, renting it out via sites like Airbnb shouldn’t matter, though it may be difficult to establish a firm monthly rental income figure unless it’s very consistent.
But it seems lenders aren’t too keen on including this income when qualifying borrowers for a refinance on an owner-occupied property. That’s where it gets murky.
How often is the property in question being rented? Is it once in a blue moon, once a week, seasonally, etc.? Lenders need to know these details to adequately assess the risk of the underlying loan. Otherwise occupancy type wouldn’t matter.
But it does matter, a lot. In fact, it’s one of the biggest drivers of both LTV limits and interest rates, and occupancy type leads to a slew of other restrictions.
So you might want to think twice before showing your lender how much your primary residence is raking in thanks to a short-term rental.
It could actually end up costing you in the form of a higher interest rate or an outright loan denial.
(photo: Connie Ma)