Short-term rental services like Airbnb and Vrbo have become much more popular in recent years. In response, local regulations have become stricter in some parts of the country. However, the mortgage industry and its public arbiters have responded to the trend with more accommodation than restriction.
Last year, public mortgage company Fannie Mae announced the rollout of a pilot program with Airbnb and three mortgage companies that would allow homeowners to apply for a refinanced loan, backed by income earned through the service. Quicken Loans, one of the lenders to partner with Airbnb and Fannie Mae under the pilot program, extended similar terms to Vrbo users earlier this year.
Also this year, Fannie Mae released an updated version of its “Second-Home Rider” document to clarify its underwriting policies regarding rental income. Essentially, the new endorsement confirmed that owners of a second home could rent out that property after one year of ownership, and that Fannie Mae would not classify those homes as investment properties (which require different underwriting standards and rental rates). often higher interest).
The sum of these developments has been positive for current and potential landlords hoping to earn income through a short-term rental platform. Not only do owners have the opportunity to obtain potentially more favorable financing conditions for their main residence if they rent it out, but they also have the same possibility of doing so if they buy a second home.
Bill Banfield, executive vice president of capital markets at Quicken Loans, said a mortgage refinanced through his company’s partnership with Airbnb or Vrbo could also be ideal for hosts looking to make upgrades that will increase attractiveness. of a property for travellers. “These renovations, made possible by Airbnb and Vrbo partnerships, can allow landlords to increase the rent on their homes, and even hire more tenants if they add a bedroom as part of their renovations,” Banfield said. .
This represents a marked change from just a few years ago, when anyone looking to invest in the booming “home-sharing” economy by taking out a conventional second mortgage could struggle to find a lender to work with. As Fannie Mae buys and securitizes mortgages that meet its standards, its recognition of the short-term rental market opens up new opportunities for buyers and lenders. Lenders are often reluctant to sign loans that cannot be resold in the secondary market to Fannie Mae or Freddie Mac, at least not without charging an appropriate risk premium.
This shift in stance from the lending community is also blurring the lines that were once drawn between a primary residence, a vacation home and an investment property. Under Fannie’s new endorsement, for example, homeowners can assign their second home to a property management company after one year of ownership without breaking the rules. The lender will still have to agree to the arrangement. In the past, second homes purchased for the express purpose of earning rental income generally had to be financed with another type of mortgage with a higher interest rate, reflecting the understanding by lenders and regulators that a loan on a house other than the borrower’s principal residence was more exposed to the risk of default.
Banfield noted that official recognition of these new revenue streams by lenders and federal agencies is a sign of progress for borrowers in general. “The Airbnb and Vrbo partnerships are the first step in allowing additional sources of real, documented income to be considered when qualifying consumers for home financing,” he said. “It’s a step in the right direction and I’m sure more revenue streams will be added in the years to come as new technologies are created to validate these revenue streams.”