As vacation travel creeps back to pre-COVID-19 levels, the demand for short-term rentals has increased right along with it. According to research done by Doorloop, by the year 2026, the short-term rental market is expected to reach a valuation of $8.9 million. If you want to tap into this hot market, there are a few different ways to get a loan to purchase a short-term rental property. Here are two options:
- Conventional loan: A conventional loan is the most common type of loan for purchasing a property but can also be the most difficult to obtain. To get approved, you must be able to show qualifying income history using tax records and W2s, have a good debt-to-income ratio and credit score, and have a sizable down payment.
- DSCR loan: A DSCR loan uses the debt service coverage ratio to measure the cash flow a borrower has to pay against current debt obligations for an investment property. A DSCR loan is a non-QM loan used by real estate investors to help them qualify for a loan based on their property’s cash flow without having to verify personal income.
A DSCR loan is especially appealing to investors because the lender does not require the borrower to provide tax returns, W2s, or other official documents to secure the loan. They just need to show that the rental property income will exceed the incurred expenses.
If you do decide to pursue a DSCR loan, here are some of the qualifying requirements:
- Up to 80% max loan-to-value (LTV) ratio
- Eligible property types are 1-4 family and warrantable condos
- There may be a minimum and maximum loan amount
- A pre-payment penalty may apply
- Loan terms can vary from 5 to 30 years
You may also need to be able to provide:
- The purchase price or appraised value of the property
- Monthly HOA dues (if applicable)
- Address of property
- Projected income from rentals
- Estimated vacancy rate
- Estimated monthly expenses, including ongoing maintenance, repairs, and property management fees.
A good credit score (usually 680+), a DSCR greater than 1.0, and the ability to make at least a 20% down payment are crucial to securing a DSCR loan.
If you are considering purchasing a short-term rental property, research and understand the risks involved. Short-term rentals can be a great way to generate income, but they can also be more challenging to manage than traditional rentals, requiring regular cleaning and upkeep.
For more information on securing a DSCR loan to purchase a short-term rental, talk to the experts at NASB at 855-921-4921 or click here for more details.