Can Short Term Rental Income Hurt Your Mortgage Refinance Application?

One of the most significant financial trends to sweep the country is more of a hit with homeowners than refinance mortgage lenders.

Logically, it sure seems as though a loan application which shows extra income through short-term room rentals would be a winner, something that would greatly please mortgage lenders.

The catch is that it’s not a sure thing, and in some cases, room rentals could actually be a negative.

New Trend Creates Uncertainty

Across the country, a number of electronic platforms now allow those with extra space to provide short-term housing.

National services such as Airbnb, Flipkey, HomeAway and VRBO are at the heart of this new business, one which takes an idle asset – that unused mother-in-law suite or extra bedroom – and puts it to use.

The result is that many homeowners are now getting cash for their quarters, money that can help with monthly bills and even mortgage payments.

At first, short-term home rentals seem like a win-win business proposition: the homeowner earns income while the traveler gets space for a few days, space that might be a lot cheaper than standard-issue hotel rooms.

The catch is that although the cash earned from short-term rentals is real, it may not automatically count on a mortgage application.

Home Rentals And Your Refinance Mortgage

For a very long time, there has been a business which offers short-term rentals — the hotel industry. Like most industries, it has not been shy about seeking legal protections for its products and services.

Check the local rules for virtually all jurisdictions, and you will find laws on the books which prohibit unlicensed short-term rentals or leases of fewer than 30 days.

These laws are largely unenforced, but that is changing. According to the New York Post, on October 21, 2016, New York Governor Cuomo signed a bill that would impose fines of up to $7,500 against hosts who posted short-term rentals. A California couple who had already paid $2,081 for their room found themselves with nowhere to stay when another resident reported their host to the authorities.

Rental Income: Is It Reported?

For lenders, the new surge in short-term rentals raises a number of issues. The money is nice, and congratulations on that, but whether such funds can be counted in a refinance home loan application is uncertain. Here’s why:

First, the lender will want to see that the rental income has been reported on tax returns. If income is not reported, it doesn’t usually count.

Note that if you report short-term rental income, it may not be taxable, depending on how many nights the property was rented. See a tax professional for details.

Is It Legal?

Second, if the income is reported, was it legally obtained? Here we get back to those sticky local rules that ban short-term rentals.

Lenders like to see income that’s ongoing, because mortgages tend to be lengthy obligations lasting 15 or 30 years.

If cash is coming from unlicensed room rentals, there is the possibility that the money might be cut off at any moment by an irate neighbor who reports the matter to local authorities.

Is It Your Primary Residence?

Third, is the property a residence? Mortgage lenders generally are in the business of financing homes with one-to-four units, and the best refinance rates go to those being used as primary residences.

New York state found that six percent of the units it studied captured almost 40 percent of the private short-term rental income.

In other words, some properties did a lot of short term rentals, a volume which will make lenders wonder whether the property is a comfy residence or an unlicensed hotel.

It’s not just lenders who will have such questions. The property will have to be appraised and that’s where problems are likely to arise.

Home, Sweet Boarding House?

Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and a nationally-recognized valuation authority, notes that “a room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.

“If there are more than four units, the property is outside the one to four units certified residential appraisers are permitted to appraise, and outside the one to four unit limitation for loan purchase by Fannie and Freddie.”

The Future Of Short-Term Rentals

While the current situation is muddled and puzzled, there’s a very great likelihood that short-term home rentals will be increasingly legitimatized.

In the same way that Uber has disrupted the traditional cab industry, the odds are that the same thing will happen with short-term rentals. The reason is that the private rental rules now on the books were passed when no one cared and are largely unenforced.

Now, the landscape has changed. A very large number of homeowners want to be in the short-term rental business, or are at least disinclined to report their neighbors.

The police surely don’t want to break into homes in search of paying guests, and state and local lawmakers really want homeowner votes.

Be Careful Out There

For the moment, homeowners with an interest in earning a few extra dollars from short-term home rentals should get advice and counsel from a local real estate attorney before signing up guests.

In addition, speak with your insurance broker to assure that you have adequate coverage. Some policies allow short-term rentals, some do not, and there are differing definitions regarding what is or is not an allowable short-term rental.

By Peter Miller | The Mortgage Reports

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