Many people who want to get a mortgage may not know they can use rental income to sometimes qualify for the loan. This can apply to a property you currently own and rent as well as a property you are planning to buy and rent. Below is more information about how VRBO rental income works in 2024.
How Does a Mortgage Underwriter Calculate Rental Income?
When a property has a tenant, lenders typically consider a percentage of the income specified in the lease to estimate projected rental income. The standard practice is to use 75% of the total reported income, with a 25% deduction to accommodate potential vacancies and ongoing maintenance costs. This method ensures a more conservative projection, accounting for potential fluctuations in rental income due to factors such as tenant turnover and property maintenance needs.
Do Mortgage Lenders Use Airbnb Rental Income?
Yes. Fannie Mae Guidelines permit lenders to extend conventional loan offers that consider projected income from short-term rental platforms, which include, but are not limited to, popular travel sites like Airbnb and VRBO. Also consider Fannie Mae second home loans,
How Does FNMA Calculate Rental Income?
When utilizing existing lease agreements or market rents as documented on Form 1007 or Form 1025, the lender is required to determine the rental income by applying a calculation. This involves multiplying the gross monthly rent(s) by 75%, commonly known as “Monthly Market Rent” on the Form 1007.
Some mortgage companies will give the buyer the benefit of the doubt when you are buying a rental property with the idea to rent it out. This kind of mortgage financing is known as non-owner-occupied mortgages and it will cost you more than buying a primary home. You can generally expect to get a rate that is 20 to 35 basis points more than owner occupied housing.
If you have had a rental property for the last several years on your house and your new rental agreement is higher than the rental income you had in previous years, you will not be able to use the new income to qualify for another mortgage. The reason is that you do not have a history of getting this income.
Rather, the mortgage lender will usually do a rental property analysis. It will take into consideration the expenses, insurance, depreciation, mortgage and interest that is paid to banks. The net income that the lender determines in this calculation will decide how much the rental income will hurt or help your ability to borrow funds.
Note that if you want to get a mortgage, it is important that showing a big loss on Schedule E that shows income and losses from real estate can reduce your ability to get a mortgage. It will not stop you always from getting a loan, but it will be a factor in your debt to income ratio.
Some other things to keep in mind regarding rental property income and qualifying for loans include:
- Projected rents may be used by most mortgage lenders to offset the mortgage payment by as much as 75% of the fair market rent that is projected, which is determined by doing an appraisal when the property is bought.
- If you own a rental property for the last year, the lender will do an average of your expenses. This could affect your debt to income ratio and how much mortgage you can get.
- If you purchased a rental property in the past year but have not yet filed your tax return, you may use 75% of the fair market rents projected with a rental agreement. This will bypass the rental average that lenders use today.
It is important to note that how you report expenses on the Schedule E is the key to how much loan you can qualify for. Even if your property shows a loss, it may make sense to borrow money still. Keeping the property over the years can mean carrying forward your losses against taxable earnings in the future.
On the other hand, selling the property can give you extra funds that can allow you to buy another rental and minimize the rental losses you have in the process.
As always, a strong credit score always helps you to get a better and more affordable mortgage as you will get a better rate and terms.
The bottom line is that it is important to remember that you can buy a home when you have rental income. This is true for buying a primary home or buying another rental property. The key is to show that you are making a profit with the rental property income. Learn more about how to buy a investment property to increase your income.
Can I Use VRBO or Air BNB Rental Income to Qualify for Mortgage?
Yes, many mortgage lenders will accept your rental income as your primary income and grant your application for a home loan or refinance.
Many other lending providers are mainly concerned with your financial situation and whether you can afford to make the monthly payments in a stable and risk-free way.
Mortgage lenders understand that some investors may not have any other source of income, such as a salary.
If an investor receives a salary, it might be low or irregular and therefore not reflect their economic situation and ability to pay the debt.
By taking VRBO rental income into consideration to help investors access a mortgage, they’re acknowledging that every situation is unique and some situations don’t apply to every investor when seeking financing.
Learn more about investment property loans.
As such, it’s important to understand the definition of rental income from a loan officer’s standpoint. It’s the rent you receive from tenants who live in a property you own. You can break it down into two types:
Actual income: This is the documented rental income that you receive regularly and is recorded on your tax returns. A loan officer can calculate and verify your actual rental income to help you qualify for a mortgage.
Subject income: Subject income is the estimated rental income you expect to generate from the property you want to acquire through financing. Lenders treat subject rental income differently from actual rental income.
In some cases, a loan officer can also evaluate your ability to pay off the loan based on evidence of past rental payments made on time.
FAQ for VRBO and AirBnB Income
Can I get an Airbnb loan?
Yes, there are VRBO and Airbnb loans available but you may need seek a non QM or private money lenders. These non-traditional lenders offer a unique home loan for Airbnb and VRBO income for qualified borrowers.
Do they offer VRBO and Airbnb loans with no down payment required?
One advantage of government-insured multifamily loans is the ability to buy an Airbnb property with a lower down payment. In some cases, you may qualify for an Airbnb loan with no down payment but there are conditions. I you plan to use an VA or FHA loan for a rental property you must reside in one of the units for at least a year.
What is a DSCR Loan?
A Debt Service Coverage Ratio or DSCR loan is a type of real estate loan designed to finance Airbnb properties. These rental income loans are based on the property’s cash flow potential rather than the borrower’s personal income, making them advantageous for short-term rental properties.
Does Fannie Mae use short term rental income?
Yes, Fannie Mae allows lenders to consider projected income from short-term rental platforms when offering conventional loans. However, there are certain restrictions and requirements with short term rental income to keep in mind:
- Documentation: Borrowers must provide proof of at least one year of short-term rental income from other properties owned by the borrower. (See Fannie Mae Airbnb income requirements)
- Classification: Lenders are allowed to classify short-term rental income as either business income or rental income. If classified as business income, the lender must follow the Selling Guide’s underwriting guidelines for business income. If treated as rental income, Fannie Mae requires the Form 1007 to be obtained.
- Eligibility: Properties with a high number of short-term rentals or hotel-like amenities may not qualify for Fannie Mae loans. A building is considered “transient in nature” if most of its units are rented for less than 30 days
References: Can Rental Income Help Me Get a Mortgage?
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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