DSCR Loan for Airbnb Financing Strategies for Hosts

Do you make extra money renting out your house or apartment on Airbnb?

Ever wonder how much more you could make renting multiple homes instead of just one?

With DSCR loans for Airbnb units, growing your rental portfolio could happen faster than you think.

DSCR loans work differently than traditional financing. They use income from the property you’re buying — not your income from work — to underwrite the loan. As a result, your personal finances don’t have to limit your borrowing power.

How DSCR loans for Airbnb units work

At their core, DSCR loans for Airbnb units are simple: If the unit will earn more than its full payment each month, you can probably get approved for the loan.

That’s how DSCR — debt-service coverage ratio — loans work, and that’s why experienced landlords have been using them for years. DSCR loans remove personal income from the lending equation, allowing each new unit to justify its own financing.

But, as with any other kind of borrowing, the lender needs proof you can repay the loan. So you’ll need to finance a property that can earn reliable short-term rental income.

How do you use DSCR loans for Airbnb units? 7 steps

DSCR loans need larger-than-average down payments: 20% or more in most cases, compared to the 3% to 5% needed to buy a primary residence. Investing more of your own cash upfront means you have more to lose if you can’t make the payments.

So, make sure you’re buying a property that’s likely to earn a steady income. With Airbnb units, there’s good news and not-so-good news about rental income:

• The good news: Airbnb rentals can earn more, per day, than traditional long-term rentals that have one full-time resident
• The not-so-good news: Airbnb units are more likely to spend time empty, earning nothing

The first step for using a DSCR loan for an Airbnb unit is buying an in-demand property, one that can stay booked.

Step 1: Target high-earning properties

In-demand properties earn the most reliable short-term rental income. That’s no mystery. But not everyone can own Airbnb units around the corner from Disney World or Times Square.

You’ll need to find properties in your area that are close to people who need to spend the night. Places near convention centers, larger universities, or regional theme parks, for example. Use your knowledge of your local market to find in-demand units. 

Step 2: Run some numbers yourself

Before applying for a loan, see for yourself whether a unit would earn more than its monthly payment.

To do this, you’ll need to think like a lender: in numbers. Specifically, in DSCR numbers:

• A DSCR of 1.0 means you earn exactly enough to cover your debt on the property
• A DSCR of 1.2 means you earn 20% more than you need to pay. This is good
• A DSCR of 0.8 means you earn only 80% of the loan payment. You’ll probably need to avoid this Airbnb property

Lenders usually want to see DSCRs of 1.0 to 1.5 for Airbnb units. That means you’d need to earn, through rent, 100% to 150% of the unit’s debt payments each year.

To calculate a property’s DSCR, you’ll need to know how much the property could earn. Check out AirDNA for that, or look at listings for similar properties in the area. As for costs, a mortgage calculator can help estimate your monthly payment.

Step 3: Get a pre-approval from an Airbnb DSCR lender

When you’ve found an in-demand property whose numbers look workable, it’s time to start working with a lender.

More than typical conventional mortgage lenders, DSCR lenders see borrowers as individuals with unique needs. So instead of entering data and uploading W2s to get pre-approved, you’ll start by submitting a loan scenario.

The lender will want to know about your plans and goals as an investor. And, even though your personal income doesn’t matter, your credit score will. Many DSCR lenders look for scores of 660 or higher.  

Step 4: Make an offer

When you have your loan pre-approval in hand, it’s time to make an offer on the Airbnb unit you’d like to buy. Your pre-approval from a DSCR lender shows the seller you’re making a serious offer.

Like any real estate transaction, this one will require closing costs which will likely range from 3% to 5% of the sales price. Negotiate for the seller to help pay these costs if you need to.

And be sure to make your offer contingent upon the lender approving your financing. That way you can get out of the deal without losing money if new market data changes the lender’s outlook.

Step 5: Send the offer to your lender

Sending your accepted offer to your lender will shift the financing process into full gear.

At this point, your DSCR lender will order an appraisal to verify the value of the home you’re buying. The lender will also analyze your income potential to verify your DSCR. 

Step 6: Submit lender requirements

During the underwriting process, your loan officer may ask for extra documents. Do your best to provide this information as quickly as possible so you don’t delay closing.

Also, until the loan closes, avoid opening new credit accounts or over-using existing accounts.

Step 7: Sign final loan documents

After your lender approves your loan, it’s time to sign the final documents, close on the mortgage, and get the keys to your new Airbnb property.

Then, you can list the property on Airbnb and start accepting short-term tenants.  

Example DSCR calculation for an Airbnb property

Here’s a loan scenario that shows how DSCR loans work:

*For example purposes only. Get a personalized quote here.

As you can see in the last two rows on the table, this hypothetical borrower’s short-term Airbnb rental income far exceeded the same home’s long-term rental potential.

But, short-term rental income is also less reliable, so lenders usually require a higher DSCR for Airbnb loans: 1.0 to 1.5. That way, if the unit sits empty for a week or so each month, you could still cover the debt.

Some lenders allow DSCRs below 1.0 for long-term rentals, especially when the borrower has cash reserves to make up the difference, because long-term rental income tends to be more consistent.

What is AirDNA and how do DSCR lenders use it to verify future income?

How can you know, for sure, how much income an Airbnb will earn? You can’t. Neither can your lender.

But lenders can estimate a property’s potential for income, and you can too. Many lenders check AirDNA data to estimate a property’s future income. AirDNA analyzes a property within the context of its market.

Anyone who’s willing to pay for a subscription can use AirDNA. If you’re serious about accumulating Airbnb properties, AirDNA will likely be worth the subscription cost. It could help you target ideal properties to buy.

What if the property doesn’t meet DSCR requirements based on projected Airbnb income?

If your property’s projected income won’t meet your lender’s DSCR requirements for short-term rental homes, you may still be able to finance the home with a DSCR loan.

But instead of financing the home with a DSCR loan for Airbnb, you’d need to finance the home as a long-term rental.

Long-term rentals earn less income per day, but their income is more stable since tenants use these homes as their primary residence. Because of this income stability, lenders allow lower DSCRs — sometimes DSCRs below 1.0, which is the break-even point. 

Of course, if you finance the home as a long-term rental, you’d need to operate the home as a long-term rental. But after paying it off or refinancing it, you could start using it for Airbnb guests.

Getting a DSCR loan on an Airbnb property you already own

If you already own a property and want to refinance into a DSCR loan — so you can buy a different property with a traditional mortgage, for example — you won’t use future income projections to calculate your DSCR.

Instead, you can use your actual income from the property over the past couple years.

Lenders can check your income from Airbnb, VRBO, Homeaway, or other short-term rental platforms and compare it to the loan payment to calculate DSCR.

Short-term rental DSCR loan alternatives

DSCR loans work well for investors who want to build portfolios without tying up their personal income in underwriting.

For some investors, though, other loans work better. Other options include:

Conventional loans

When you earn enough income from work to qualify, conventional loans offer advantages like:

• Lower down payments
• Lower interest rates
• Lower credit scores to qualify, often 620

Plus, you can find conventional loans at almost every lender. 

Cash-out refinance

Cash-out refinancing leverages the equity you’ve already built in your primary residence. You’d get a new mortgage, pay off your current mortgage, and receive cash from equity at closing.

You can use the cash on anything, including buying a second home to use as an Airbnb. You’d need to have a lot of existing equity to make this work. If you just bought your primary residence, you probably don’t have enough.

Home equity loan or line of credit

These loans leverage the existing equity in your primary residence without replacing your current mortgage. Instead, you’d add a second mortgage, using the proceeds to buy an Airbnb unit.

Pros here include low closing costs and competitive interest rates. Again, you’d need enough equity in your home to back the loan. Some investors use these loans to generate a down payment for a DSCR loan. 

Hard money loan

Serious investors use hard money loans as temporary financing for a new property. Hard money lenders can approve loans quickly and often with less stringent underwriting.

But interest rates and down payments will be higher, and you’d need to pay off or refinance the loan within a couple years. If you’re planning to fix up and sell the property, hard money loans can work.

Bridge loan

When you’re selling a home so you can afford another one, bridge loans can help. They provide temporary financing for your next property while you sell off other property. Usually, selling property will position you to get more affordable financing that will replace the bridge loan.

As with hard money loans, make sure you have an exit plan before taking on a bridge loan’s higher interest rates and payments.

Business loans

Commercial banks and credit unions design loans for real estate investors. These loans go to businesses and not individuals. They work best when you’re all in — not simply looking for some extra passive income.

For example, you’d need to provide a profit-and-loss statement and other official documents.

The elephant in the room: #Airbnbust

In the early days of Airbnb, property owners expected a steady flow of bookings, especially if they lived near popular attractions.

That’s changed for some Airbnb owners. In recent months, popular threads on Buzzfeed and social media have featured frustrated property owners wondering where all their bookings went.

A lot of travelers answered, saying they were tired of paying convenience and cleaning fees. Economists mentioned an excessive supply of homes on the Airbnb platform.

What does this mean for you, as an Airbnb owner? It means you should price your home competitively, provide good customer service, and finance conservatively. Think you could earn $6,000 a month? Borrow as if you’ll earn $4,000.

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• Get a quote in minutes
• Protect your rentals
• Most competitive rates in the U.S.
• *We may be compensated if you purchase through this link

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Get started on your Airbnb financing

DSCR loans finance Airbnb properties without tying up your personal income in the process.

If you’d like to expand your short-term rental portfolio by leveraging the income you’ll earn along the way, this kind of financing may be just what you’re looking for.