Having you ever thought of owning a short-term rental? The popularity of VRBO and Airbnb in recent years has given the opportunity to many to use short term rentals to build wealth over time. Becoming a real estate investor is easier than ever before. A short-term rental with regular bookings can outperform long-term rental properties like apartments or single-family homes. Additionally, you can expect your home’s value to increase in value — or appreciate — over time.
Funding, however, can be a major roadblock for would-be real estate investors. Securing a loan for a rental property can sometimes be challenging, but that doesn’t mean it’s impossible and Beam Lending Group is here to help! With a DSCR loan, you can qualify for a loan for short-term rentals and Airbnb.
Debt service coverage ratio (DSCR) loans for short-term rentals are available for new and seasoned investors, allowing you to purchase rental properties with more flexible requirements than other types of loans for Airbnb. Interested in learning more about a DSCR loan for Airbnb and other short-term rentals? This article will discuss how these loans work, their benefits and limitations, and how you can qualify.
How Do DSCR Loans Work?
Your personal income, credit score, and job history largely determine traditional mortgage loan eligibility. Unfortunately, strict lending criteria can prevent inventors from securing a loan for their next investment property. In addition, unlike traditional W2 employees, investors take deductions on their taxes, reducing their taxable income. While deductions have several benefits, such as tax savings, large deductions can hinder their ability to meet eligibility requirements on conventional loans.
DSCR loan eligibility is determined by a borrower’s debt service coverage ratio (DSCR) instead of personal income or job history. Instead of reviewing pay stubs, W2s, and tax returns, lenders calculate DSCR to determine a borrower’s ability to repay the loan.
You can calculate DSCR by dividing your gross rental income by the debt service (i.e. proposed mortgage payment amount). A DSCR of 1.0 indicates that you earn enough in rental income to afford to repay the loan. However, as you may already know, some investors have other expenses, such as operating costs, marketing, payroll, etc. Therefore, lenders like to see a DSCR of at least 1.25 to ensure you can afford to repay the loan and cover costs that may otherwise compromise your ability to pay back your loan.
Ultimately, the higher your DSCR, the more money you have to repay your debts, which reduces some of the risks for lenders and borrowers.
DSCR loans are only available for rental properties; they can’t be used to purchase a primary residence or for flipping a house because they rely on cash flow generated from the investment property. The DSCR helps lenders quickly determine whether a borrower can repay the loan without the need for personal income verification, allowing faster closing times and a streamlined approval process.
For further questions or to explore the possibility of buying a short-term or long term rental, be sure and schedule a free consultation with Marc.
