Loan Officer Training - 01/02/2025 - Mastering Short-term Rental Property Loans - Loan Officer Training with The Mortgage Calculator

Episode Transcript
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Restream recording Jan 02, (00:00):
Now it's very important to note what

(00:03):
exactly is a short term rentalproperty, right?
Short term rental property is aproperty that can be legally
rented by the day, week, ormonth.
Or month.
Now it is very important to notethat do not confuse short term

(00:24):
rental properties.
With condo hotels.
Now, condo hotels are usuallygoing to be short terminal
properties, but, uh, they tendto be much more restrictive,
right?
Um, condo hotels usually have adeed restrictions.
Not all of them, not going tosay a hundred percent of them

(00:45):
do, but most of them have deedrestrictions, which is going,
which are going to prevent howoften the, um, Owner can occupy
the property.
In some cases, it'll state thatthey can't occupy it for more
than six months in a calendaryear.
Other times it may state can'toccupy for more than 30 days

(01:06):
continuous, whatever the deedrestrictions may be, they are
going to vary.
And sometimes the restriction isactually from the city.
City.
If the property is deemed acondo hotel, uh, like in Sunny
Isles, Florida, for example.
So do be aware that, um, not,not all short term rental

(01:29):
properties are condo hotels.
If you do have one that is acondo hotel, then you need to
review those guidelinesspecifically.
To see what you can do in lightof what we're going to discuss
now in our presentation.
Um, now a short term on aproperty is usually not going to

(01:51):
have any type of a lease exceptfor maybe a property management
lease.
Um, be aware this may present.
Some issues in the structure ofyour loan after you review,
after you review the guidelines,because, uh, unleased properties
may have LTV restrictions.

(02:13):
And in some cases, for example,if it's, uh, a refinance, May
not be possible to do at all, soI, I can't really generalize all
guidelines as one, but I ampointing out what the, um, you
know, obstacles may be, uh, ifit, if it is a short term on a

(02:38):
property.
We're not going to have a lease.
Now, again, this is when it is apurchase, excuse me, backwards.
This is usually an issue whenit's a refinance and not a
purchase, because when it is apurchase.
The property can be vacant,right?
It's not yet owned by theborrower.

(02:58):
And I'm going to touch base onthat in a minute regarding
structuring your short termrental property loan, but let me
cover this other, um, uh, twoimportant bullet points here.
Please be aware that mostguidelines do not allow short
term rental income for, uh,properties.

(03:19):
With 5 or more units, right?
Usually those are going to belong term rent only.
So do be aware if you havesomebody that has a 5 plus unit
property.
And, uh, they're looking to doshort term rental.
You may want to just qualifythat then as a long term rent.

(03:41):
Uh, but again, where it posesthe more, uh, bigger issue is if
the, if it's a refinance andthey're currently already
operating it as a short termrental, you may have issues.
being able to qualify theborrower.
So you'd have to look far anddeep to try to get somebody to

(04:02):
approve that if they're doingshort term rentals.
Now, be aware that when you havea purchase, right, just because
the borrower is telling you,Hey, I'm going to operate it as
a short term rental does notnecessarily mean that you have

(04:22):
to submit.
The loan using short term rentalincome, because remember if they
are purchasing the property andespecially, let's say for
example, if there's a currenttenant in place with a lease,
then they're not going to kickthat tenant out anytime soon.
So we would just use the longterm rent.

(04:44):
Um, even if the property wasvacant, if the property
qualifies using long term rent,and it is a purchase, then use
long term rent.
Even, you know, it doesn'tmatter what the borrower says
they're going to do with theproperty.
If it's a purchase and itqualifies with long term rent,

(05:07):
then we can qualify theborrower, borrower using long
term rent.
Then after they close, theydecide they're not going to, uh,
qualify with, uh, if they decidethey're not going to use, uh,
you know, operate it as a longterm rental, but they're going
to operate it as a short termrental, that's their prerogative
to do so.

(05:27):
Uh, so you do not necessarilyhave to qualify the borrower
with short term rental income.
If it is a purchase, because thereason I say that is because in
many cases, there are loan levelprice adjustments for, um, using

(05:48):
short term rental income versuslong term, uh, some cases it's
going to be an LTV adjustment,you know, maybe though, like in
some cases, it's a maximum 75%.
LTV on a DSCR loan, uh, ifyou're using long term rent,

(06:10):
excuse me, if you're using shortterm rent.
As opposed to long term rent, orthey may in other cases say,
Hey, it's a 5 percent reductionfrom the maximum allowed by the
program.
So if that borrower's creditscore, uh, would have only
qualified them for 70 percentmaximum, and you're using short

(06:31):
term rent, then it could be then65%.
Now, again, don't generalizeacross the board on all
guidelines.
Uh, that is only, um, you, youhave to read the specific
guidelines because they allchange.
They're all different fromoption to option, but do be
aware that it is not arequirement to use short term

(06:52):
rental if, you know, if they saythat's what they plan on doing
with the property, if it's apurchase.
And the property is vacant.
If it's leased already, then,you know, you're going to use a
long term rent, but if it'svacant, then see what the
options are, uh, with long termrent, because besides the LTV
adjustments, there's also loanlevel price adjustments and the

(07:12):
loan level price adjustment insome cases may be as high as two
or two and a half points add onto the cost of the rate.
When using short term rent, orin some cases they may say when
using air DNA, right, as opposedto, uh, as opposed to using a 10

(07:35):
or seven with short term rentalcomps, so to be aware, you know,
you could have again, LTV hitsor pricing hits if using short
term rental income.
So.
Uh, let's get into some of thepotential issues that I touched

(07:56):
on right now, you know, youknow, to formalize what are the
issues.
So again, first issue here isthat the property may be
considered a vacant property,right?
Like I was just mentioning, andif it's considered a vacant
property because it's no leaseon the property, then you're

(08:18):
going to reduce LTV.
on refinance transactions andactually will reduce LTV on
purchase transactions as well ifit turns out that they are using
short term rental income toqualify.
Now obviously the only the ifthe long term rent doesn't
qualify you and you need Theshort term rent from, uh, income

(08:42):
from a short term rental 1007 orfrom AirDNA, you know, that
would be one reason to do it,but as you're going to note a
little bit further down thepage, we can always go no ratio
or low ratio on a DSCR.
And still qualify the borrowerin most cases up to 75 percent

(09:05):
LTV with a pretty good rate.
So again, bullet point number 2,which I already covered using
short term rental income mayresult in an LTV reduction using
bullet point number 3 usingshort term rental income may
result in pricing adjustments.

(09:25):
Right.
So we, we covered those and Igave you more or less the real
world example of why, you know,how you could structure your
deal with long term rent if itqualifies.
Right.
So.
Scarcity of short term rentalcomps could be another issue if

(09:47):
the, uh, because if it's apurchase, you have three ways to
qualify that borrower, uh, ifthey're going to use short term
rent, if it's absolutelynecessary to use short term
rental income because theborrower does not qualify using
the long term rent.
And this may happen because thetypically properties that are

(10:11):
being operated.
As a successful short termrental property, you're going to
have a higher cost than aproperty being operated as a
long term rent.
So, in that case, you may not,the borrower may not qualify
with.
Long, uh, long term rent andthen, you know, you're, you're

(10:31):
reaching out for a short termrental 1007 and the appraiser
says, you know, there are noshort term rent comps around
here.
So then you could use their DNA,right?
Air DNA is a database.
It's a, it's an Airbnb database,but it's a database.
Of short term rental properties,so the, uh, the appraiser would

(10:54):
log into air DNA similar as theywould log into the NMLS.
Excuse me, into the MLS, themultiple listing service, to
look for comparable, uh, salesor comparable rentals.
Well, in this case, if it'sshort term rent, they're gonna
log in to AirDNA.
They're gonna look.

(11:16):
For similar, because, you know,you can't compare, uh, the
subject property, which is afour bedroom, two bath to an
eight bedroom property.
So it has to be similar style ofproperty, similar size, bedroom
count.
Proximity, you know, all thethings that you worry about with
regular comps when you'relooking for, let's say, rental

(11:39):
or sales comps, it's going to bethe same similar, you know,
gross living area, similarbedroom and bath count, similar
neighborhood, all that kind ofstuff needs to line up so that
the comparable from your DNA isacceptable.
However, one very importantpoint to note is that when using

(11:59):
AirDNA, besides the fact thatyou may have a loan level price
adjustment or, uh, or an LTBadjustment, uh, the guidelines
are usually going to state thata minimum occupancy level has to
be met.
So AirDNA, when it generates thereport, will generate income,
right?
Projected income for theproperty and will also generate

(12:23):
a projected occupancy level forthe area.
In some cases, it has to be atleast 50 percent.
In other cases, it has to be atleast 60, six zero percent.
So please do review the specificguidelines for the option chosen
to make sure that you meet allof the requirements.

(12:47):
Um, one other important note,uh, when using short term rental
income and especially, uh, whenusing AirDNA.
Is that it may require a higherminimum DSCR for a purchase.
In some cases, I've seen theDSCR have to be 1.

(13:07):
5 when using short term rentaland or when using AirDNA.
So do review the guidelines.
Again, we cannot generalize hereacross the board because each
guideline is specific.
to that investor.
So do review it and make surethat you're not missing any

(13:29):
important points.
Uh, now one other potentialissue, uh, when using short term
rental income is investorexperience.
Now you will note in most casesfor a regular DSCR loan,
Investor experience is somethingthat needs to be taken into
consideration, right?

(13:49):
In most cases, they're going torequire either investor
experience, or they're going torequire the borrower at least
have a primary residence thatthey own, or that the borrower
have at least a, uh, Primaryhousing expense.
Right.
So those are all things toconsider and there may be more
again, because I'm just touchingon certain other points from

(14:12):
different guidelines that I haveseen, because again, there is
not one guideline that we useacross the board for the
situation.
So.
And, uh, one in particular, Ican recall, which is a great
option for short term rentals,uh, will not accept a borrower

(14:32):
using short term rental incomeif that borrower does not have
any experience with short termrental property.
So not necessarily justinvestor.
Experience, but investorexperience with short managing
short term rental propertiesbecause they are a totally

(14:54):
different ballgame.
And like I mentioned, when usingshort term rental income, there
may be a requirement.
Of a higher minimum DSCR forthis particular option.
I was mentioning it's 1.
5 minimum on a purchase Uh whenusing short term rental income,
so they'll give it to you, butyou got to jump through extra

(15:16):
hoops of fire So I I did touchbase Uh now i'm going to expand
on it here And you know usingDSCR loans in general to qualify
the the borrower, uh using longterm rent Instead of short term
rent.
So, you know, it's going to bepretty easy if you have a

(15:39):
projected long term rent income,or if it's currently rented
would be even better, but youknow, typically the borrowers
real estate agent, if this is apurchase, can provide rental
comps for the area.
And if you get some rentalcomps, then you can confirm that
your DSCR is at least 1.

(15:59):
0 or above.
Awesome.
Cool.
That's not a problem when it isa purchase.
Now when it is a refi, we dohave a couple options where
they're just going to ask us forany of the three.
Either a 1007, be it long termrent or short term rent.

(16:23):
Or a lease or a short termrental revenue reports for the
last 12 months or, you know, orso if any of these factors that
you have, um, would work, that'sacceptable and obviously the,
the best option would be thatthe long term rent in the area

(16:45):
covers.
And we get a 10 0 7 withlong-term rent that covers at at
least a 1.0 or above, then we'regood to go.
We don't have to worry aboutanything.
We, and, and, and again, this isone particular option that we
have.
This is not all options.
This is one of our particularinvestors that is going to ask

(17:06):
either for a 10 0 7, whether itbe short term or long term, or a
lease or, um.
It's pretty much either or therevenue reports.
If it's, if it's a seller andthe seller is currently
operating as a long term rent, ashort term rent, or if the
borrower, if it's a refinance,they're currently operating it

(17:26):
as a short term rent and theyhave at least the last 12 months
revenue reports, we can usethat.
Now that's a little bitdifferent from some of the other
options that if it's a refi,they may ask you for a lease or
not.
And this particular option, theydon't ask us for a lease.
So you don't have it leased.
It's not a problem.
That's that one particularinvestor.

(17:48):
Most of the other ones are goingto ask for a lease if the
property is, uh, currentlyowned, if it's a refund, but
going back to the longterm rent,if it's 1.
0 or above, that's great.
You know, we can do 80 percentand in some cases we can even do
85%, right.
Depending on a credit score, theborrower and all that kind of

(18:08):
good stuff.
And if it qualifies as alongterm rent.
That's amazing.
Then 85 percent LTV on apurchase.
Good to go.
If the DSCR is less than oneagain, we do have options for 0.
75 to 0.
99 and options less than 0.
75, usually up to 75 percentLTV.

(18:29):
This is as an alternative ofhaving to use short term rental
income on purchases and even insome cases on refis.
Right.
Where you may have loan levelprice adjustments, LTV hits, and
when the dust settles, after youdo the math, you may realize
that you're going to get betterpricing possibly without the

(18:49):
short term rental loan levelprice adjustment.
So again, do be aware of all thedifferent ins and outs of the,
um, guidelines for DSCR loans,because like I mentioned, some
options let you use just the1007 or the lease.
Or the short term rental income,so don't fall into the trap of

(19:14):
thinking you don't you have touse, you know, short term rent
if they're either going tooperate it as a short term rent
property, or if they arepurchasing it, or they're
currently operating it as ashort term, right?
So if it's if it's a purchase.

(19:34):
You definitely have moreoptions.
If it's a refi, you still havesome options.
You just have to know how toproperly structure the loan.
And in some cases, we actuallyhave refis that will let you use
their DNA, short term rent, ifthe property was just put into
service on a refi.
Right, so that's anotherinteresting example.

(19:54):
If you need short term rentalincome, obviously, if the
property is vacant and thatparticular investor doesn't let
you submit vacant property, thenthey won't consider it vacant.
If it's a short term rent, butthen you have the other
guideline.
So I've covered quite a bit ofmaterial here.

(20:15):
Um, we have very good DSCRoptions and wanting to see if we
have any questions on dealingwith short term rental
properties financing for eithera purchase or a refinance.

(20:36):
You gotta have a question or twoout there.
I'll give it another minute.
All right, well, short termrental properties are again, you
guys saw the explosive growththat they have had.
There's a lot of them out there.

(20:57):
It's a great niche to work.
Not very many people understandthe ins and outs on financing
short term rental properties andall the flexibility that we have
with all the different programsthat we have that already are
used to short term rentalproperties and have.
Well, And have, uh, updatedtheir guidelines to reflect, uh,

(21:20):
working with short term rentalproperties.
So, no questions today.
So, I do thank you for being ontoday's training.
And I look forward to seeing younext Thursday.
Thank you and have a great day.
Oh, wait.
Uh, okay.

(21:41):
No, uh, no questions.
All right.
Thank you, everybody.
Have a great day.
Wait a minute.
I do see a question here.
I don't know what happened withmy visual, but I will answer
your questions for, for the DSCRmonthly.

(22:03):
Okay.
For the DSCR, the monthly orhigher.
Is that because of the multipleunits?
Uh, okay.
I'm not sure, Nico, if Iunderstand the question for the
DSCR, the monthly or higher.
No, that's not, you're making anassumption there, Nico.

(22:25):
I guess you're talking about,are you talking about the
monthly payments are higher?
I mean, a DSCR property can beone to four units or five plus
units.
So I'm not pretty sure if Iunderstand the question.
And all right, that seems to beit.

(22:47):
Thank you all and I look forwardto seeing you next Thursday in
the next training.

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Loan Officer Training - 01/02/2025 - Mastering Short-term Rental Property Loans

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