Conventional mortgages: You might be familiar with a conventional mortgage already, but they are effectively loans that have certain guidelines established by Fannie Mae and Freddie Mac. Your credit and income are both important, and you’ll need anywhere from 20% to 30% of the property’s value for a down payment.
Hard money loans: Sometimes referred to as a “fix and flip” loan, a hard money loan is a short-term option for property investors. While your credit and income are a component of qualifying, the primary decision is made on whether or not the property will be able to generate enough income to pay off the loan quickly.
Home equity loans: Depending on where you live, you might be able to qualify for a home equity loan or line of credit (HELOC.) You might be able to secure up to 80% of your home’s value to invest in other property. As with a conventional mortgage, your credit and income are key as is the value of the property you’re receiving the loan against.
Each of these Airbnb loans comes with different terms — that includes your APR, how long your loan is for, as well as whether you can pay off the loan early or not.
Airbnb loans are a great property investment strategy for people who have access to credit and know how to maximize their rental income. Qualifying for them, though, is the most critical part of this strategy.
1. Maintain a “good” to “excellent” credit score.
Your credit history and credit score are two of the most important components in qualifying for Airbnb loans. Even with hard money loans that you plan to pay back quickly, you’ll still need a relatively good credit score to qualify. What constitutes as “good,” though, varies from lender to lender.
In general, most lenders look to the three credit bureaus for guidance. Experian, for example, lists and categorizes a range of credit scores. “Exceptional” credit is anything over 800, but you should still get some of the best offers if you have a “very good” credit score of 740-799.
2. Pay down any significant outstanding debt.
Another important consideration when applying for Airbnb loans is your debt-to-income ratio or DTI. This is a measure of how much debt you have compared to how much income you have. In general, lenders want to see a DTI that is lower than 36% to approve a mortgage.
While lenders don’t generally count the income you might bring in from the new rental property, you can improve your DTI by increasing your monthly income. Alternatively, you should pay down your most significant debts to lower your DTI.
3. Save money for a substantial down payment.
While your credit and DTI are both important aspects of qualifying for Airbnb loans, another common consideration is your LTV. This is a measure of the value of the property against the value of the loan. It varies from lender to lender, but you generally can’t exceed an LTV of 75% if you’re refinancing.
If you find a property that offers the right value but have a hard time qualifying, a bigger down payment can help reduce the loan costs. You’ll still likely need at least the 20% to 30% minimum but saving money will give you more loan flexibility.
Choosing the right Airbnb loans can be time-consuming and frustrating. It’s rarely a good idea to take the first offer you get, but multiple credit inquiries can complicate issues in the future. That’s why you need to be strategic with your loan research.
Before you start looking for the best Airbnb loans, review these three tips for narrowing down your options:
Research several lenders: Every lender has different terms, as well as features and benefits of working with their company. You want to research several lenders before you start applying for credit.
Compare offers carefully: It’s important to look at the loan terms, like your interest and loan length, before you decide. Compare the offers carefully to make sure you don’t miss any fees or additional costs.
Ask the right questions: If you aren’t sure if a loan is right for you, contact the lender directly. Ask if they work with investment properties and what the requirements are. Find out if there’s anything you need to know about their organization.
While you won’t achieve this overnight, the research you do here will be critical to your investment potential in the future.
Why You Need the Right Airbnb Lender
It can be easy to glance over loan documents and choose the first one that has a low offer. Reviewing loan terms certainly isn’t a glamorous task, but it does mitigate problems in the future. The right Airbnb lender will have competitive rates and offer other benefits that improve your customer experience.
Choosing the right Airbnb loans is critical to ensuring you have the best rates. The best rates will help boost the amount of rental income you receive every month.
Searching for the best Airbnb loans for your situation? Rental Home Financing has the options you need to build your rental portfolio.