Leveraging DSCR Loans for Airbnb and Other Short-Term Rentals

By Bill Lyons | Updated on October 22, 2024

Funding 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. With a DSCR loan, you can qualify for a loan for short-term rentals and Airbnb.

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 DSCR Loans Work

Your personal income, credit score, and job history largely determine traditional mortgage loan eligibility. Unfortunately, strict lending criteria can prevent investors from securing a loan for their next investment property. In addition, unlike traditional W-2 employees, investors take deductions on their taxes, reducing their taxable income. While deductions have several benefits, such as tax savings, large deductions can affect 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 (including principal and interest). 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, 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.

DSCR Loans vs Traditional Loans for Rental Properties

When comparing a DSCR loan vs conventional loan, it’s important to understand the key differences in lending requirements. Traditional loans for rental properties have stringent guidelines because they are sold to Fannie Mae and Freddie Mac, which operate in the secondary mortgage market. These conventional loans are then sold to investors globally, leading to specific underwriting criteria such as income verification, assets, credit score, and collateral.

For many investors, securing traditional loans can be challenging due to deductions on tax returns or losses from other investments. Additionally, Fannie Mae and Freddie Mac restrict the number of investment properties an individual can own and do not allow properties to be purchased under an LLC.

While conventional loans might offer lower interest rates for qualified borrowers, DSCR loans are often more flexible, particularly for Airbnb and short-term rental properties. A good DSCR loan allows borrowers to qualify based on the property’s market rent rather than personal or business income. With a DSCR loan, there are no limits on the number of properties you can purchase, and you can buy under an LLC, which may offer tax advantages.

Using DSCR Loans for Airbnb: Pros & Cons

DSCR loans for Airbnb can help you generate income faster because they offer faster closing times. You can use DSCR loans to finance Airbnb properties based on the rental rates for properties in the area or Airbnb rates if you have a long history as a host. Like any other type of investment property loan, DSCR loans for short-term rentals have their benefits and limitations.

Benefits

Some of the key benefits of DSCR loans for short-term rentals include the following:

• No personal income required: The most significant benefit of a DSCR loan for Airbnb and other short-term rentals is the ability to qualify without providing personal income documentation. DSCR loans don’t take into account personal financial information, making them easier for new investors to obtain financing.
• Faster closing times: Because lenders only have to verify a property’s DSCR and borrowers don’t have to submit personal financial information, DSCRs typically have a faster application and closing process.
• No limit on the number of properties: DSCR loans allow you to invest in multiple properties simultaneously instead of having to pay off your loan before purchasing a new property.
• Unlimited cash-out: DSCR loans for Airbnb allow you to take out as much cash as you need based on your home’s equity. Cash-out can help cover costs such as maintenance and repairs to get your rental property back into shape between guests.
• Separates personal and business finances: If you close in the name of an LLC, you can keep your DSCR loan separate from your personal finances to ensure you pay the loan using business finances.

Limitations

No mortgage loan is perfect, so you should weigh the pros and cons of DSCR loans for Airbnb to determine if they’re right for you. Here are a few of the limitations of DSCR loans for short-term rentals:

• Large down payment: You can expect a large down payment with any investment property loan because this type of financing is generally considered a higher risk for lenders. Therefore, DSCR loans typically come with higher down payment requirements to mitigate some of the lender’s risk.
• Potential cash reserves requirement: Short-term rentals like Airbnb rely on your ability to continuously get bookings. Lenders want to know you have a backup plan if you go for long stretches without guests, so they may require a certain number of months of cash reserves to ensure you can repay your loan.
• Potential for further debt: Vacancies mean your property isn’t generating cash flow, which can affect your ability to repay your loan. If your rental property goes for long periods without a guest, you’re still on the hook for paying off your mortgage loan. Unfortunately, you risk foreclosure without cash flow, which can affect your personal and business finances.

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How to Get a DSCR Loan on a Short-Term Rental

If you are looking to build a portfolio of properties to list on VRBO or Airbnb, you’ll want to finance them using a short-term rental (STR) DSCR loan. To qualify for a DSCR loan on a short-term rental property, you’ll need to prove through AirDNA comparables that your DSCR will be 1.00 or more. The following applies to purchasing new STR properties:

• Minimum credit score of 700
• A good DSCR of 1.00 or higher
• 25% minimum down payment (for borrowers with 1-year of experience operating STRs)
• 30% minimum down payment (for borrowers with less than 1-year of experience operating STRs)
• Projected annual revenue divided by 12 months
• Occupancy rate exceeding 60%

If you want to refinance your STR with a DSCR loan to lower your interest rate or get cash out of your property, you’ll need to produce a stable history of short-term rental income in order to qualify for a STR DSCR cash-out loan.

In addition, a DSCR HELOAN (home equity loan) can help you leverage the equity in your existing rental properties for renovations or to expand your investment portfolio. This loan type helps you to borrow against your property’s equity based on its rental income, which makes it easier to access funds without relying on traditional income documentation.

Leveraging DSCR loans for Airbnb and other short-term rentals can have a property multiplier effect – turn 1 property into 8 properties within 8 years or 18 properties within 12 years. Using a DSCR calculator can help you project the property’s income potential and ensure you maintain a good DSCR, making it easier to scale your investment portfolio efficiently.

Secure Flexible Short-Term Rental Financing

DSCR loans can benefit new and seasoned real estate investors, offering them faster closing times and more flexible lending criteria. With a DSCR loan, you’ll qualify based on current or future cash flow from the property you purchase instead of relying on traditional income verification. However, it’s essential to understand all your loan options for Airbnb and other short-term rentals.

Griffin Funding allows DSCRs as low as 1.0 for short-term rentals, but not every investor will qualify for the loan. We can help you determine the best loan program for your next investment project to ensure you choose the right financing option. You can also use the Griffin Gold app to compare financing options, manage your finances, and get personalized help from one of our mortgage professionals.

Ready to begin your next real estate project? Apply with Griffin Funding today

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.