What Airbnb Means for Your Mortgage
Using a spare room or your house as a rental? Consider the impact on your mortgage or refinance.
Mortgages for investment properties are generally priced higher than mortgages on primary residences.(Getty Images)
As of August, Airbnb had more than 4 million listings worldwide. Travel research firm Phocuswright reports that private accommodation rentals in the U.S. reached about $32 billion in 2017 and could reach $37 billion next year. But with the growing popularity of home rental websites like Airbnb and others, homeowners and prospective buyers should know that renting out all or part of their home can have implications on their mortgage or refinance.
Andrew Weinberg, principal of mortgage brokerage Silver Fin Capital Group LLC, recently helped a client with a cash-out refinance on a home in Sag Harbor, New York. "They rented out their own home by the day for about 30 days during the year and rented some other place [for themselves] in a less trendy area," he says.
The clients had taken out the original mortgage on the house as a primary residence, but renting it out on Airbnb potentially blurred the line between primary residence and investment property. And if the lender now considered the home to be an investment property, it could mean a less favorable interest rate following its refinance.
That's because mortgages for investment properties are generally priced higher than mortgages on primary residences. "The theory is that people who live in their own property are less likely to default," says Stuart B. Wolfe, mortgage banking attorney, co-managing partner and chair of the banking and finance department at Wolfe & Wyman LLP, where he represents mortgage lenders, banks and other financial institutions.
Fortunately, because the rental was only 30 days out of the year, the lender didn't reclassify Weinberg's client's house as an investment property. But there was another complication: To qualify for the cash-out refinance, the client planned to use around $30,000 a year in Airbnb rent in addition to other sources of income. Lenders often view rent from a traditional lease as income, but Airbnb income can be sporadic and the concept is relatively new so they don't view temporary vacation rentals in the same light.
"We actually went to [government-sponsored mortgage buyers] Freddy [Mac] and Fannie [Mae] and confirmed that they … can't get the benefit of the [Airbnb] income to qualify," Weinberg explains. However, the client had just enough income from other sources to qualify for the refinance, so the deal eventually closed. But Weinberg says this highlights some important lesson for Airbnb hosts. "With any transaction, you have to calculate the borrower's income and expenses," he says. When tens of thousands of dollars can't be counted as income, it can prove problematic, so Weinberg says homeowners should understand what income mortgage lenders will count.
Elizabeth Colegrove and her husband own nine traditional rentals and vacation rental homes in South Carolina and California. They've sidestepped the Airbnb income problem by applying for mortgages on investment properties based on the more conservative but stable income of traditional lease agreements. "We get them approved based on traditional incomes and then the next year we can count them as vacation rentals," she explains.
Another benefit to this approach: If local regulations change and the couple can't use a property as a short-term vacation rental, they know they can always go back to a traditional rental. Regulations can vary depending on local ordinances, so it's important to know the rules in that jurisdiction before buying. "[For] everything we buy, the numbers have to work both ways," she says. She's found that local credit unions and local mortgage brokers are more amenable to underwriting them versus large national banks and that corporate leases running two to six months offer a middle ground between 12-month leases and Airbnb rentals.
While some mortgage lenders haven't evolved to meet the needs of buyers who are hosting on Airbnb, at least one startup attempts to fill that need. Seattle-based Loftium launched earlier this year and caters to buyers who plan to rent out in their home on Airbnb, often to subsidize their mortgage. It provides down payment assistance in exchange for a large portion of Airbnb rental income over the next one to three years. Currently, Loftium works with Umpqua Bank as the mortgage lender, with more partnerships in the works.
Under other circumstances, some buyers take out a piggyback loan, which allows buyers to avoid private mortgage insurance even if they don't have a 20 percent down payment, get financial help from family or wait until they've saved up a down payment. Buyers can now get down payment help from Loftium and share Airbnb revenue with it. "The homebuyer is not going to pay us back," explains Yifan Zhang, Loftium's CEO and co-founder. "We pay ourselves back [with Airbnb revenue]." Of course, this comes with some stipulations: The room must be continuously available on Airbnb with the exception of eight "freebie" days per year and hosts have the right to cancel up to three guests per year without penalty if they feel uncomfortable.
Zhang admits the arrangement doesn't appeal to everyone. But for those who are comfortable with home-sharing, she points out that Loftium also "provide[s] ongoing support to make the Airbnb process easy. With automation and smart messaging with guests, it becomes a passive income stream for the homebuyer."
For those purchasing a property specifically as a rental, the lower interest rates on primary residences can be tempting; however, lying about how you plan to use a property can backfire, Wolfe says. "If it's an investment opportunity, the borrower most likely would be making material misrepresentations," he explains. Even if the borrower never misses a payment, he or she could be in default of the loan due to their misrepresentation. Renting out a room in your home while you're living in it likely wouldn't cause problems unless it violates homeowners association regulations, condo or coop bylaws or local ordinances, according to Wolfe.
Of course, circumstances can change and a property that was purchased as a primary residence can later become an investment property because the owner decides to rent it out rather than sell. In that situation, Wolfe says the lender looks at whether the borrower originally intended it as a primary residence. "The longer the borrower is there before the usage changes, the more genuine the intent appears to be," he says. The lender can find out if someone actually lived in the property by asking neighbors or checking water usage, for instance. He says lenders can uncover misrepresentations during random audits or checks immediately after the loan is made.
"My best advice is for a borrower to be totally honest with their lender," Wolfe says. "Whatever the borrower's intentions are, they should be clear. If they're thinking of Airbnb-ing [the property], they should put it in writing during the loan application process." If you need a mortgage on an investment property, the lender may have another program to better suit that need.