Short-term rentals and your home mortgage
The sharing economy—supported by platforms like Uber, Airbnb, and VRBO—offers flexibility and savings, and extra cash for those who have goods or services to offer. But it also raises questions. For example, if you rent your home out through an online marketplace, does it cease being your primary residence and become rental property? Can this cause issues when you apply for a home-equity line or refinance your mortgage? Mark Wells answers questions about how the industry is dealing with this new wave.
Why would any lender care whether I rent out my house or not, if it’s just for a few nights at a time?
The mortgage industry has always put residential properties into three distinct categories: primary residence, second (vacation) home, and investment (rental) property. Each category has an assigned risk for default, with primary residences being the ‘safest’ and investment property being the most risky. This is why your primary residence gets the lowest rate on any transaction—it is the safest. Here’s the rub: If at some point a line is crossed where the use of the home is more for rental income than it is for primary occupancy, the risk of default goes up, and the lender will assign a higher rate to your transaction.
Are there other obstacles I might face if I start renting through Airbnb or other sites?
That could depend on how you report the rental income on your tax returns. The accounting rules for how this is to be reported can vary, with some accountants putting the rental income on a Schedule E form (where normal rental income for an investment property is reported), and others put it on a Schedule C (where small business income is reported). The potential problem with reporting it on a Schedule C is that you are then ‘officially’ operating a business out of your house, using the house for commercial purposes, and this is not allowed on most residential mortgage programs. For now, it would be safer to report rental income on a Schedule E.
When I apply for a mortgage, will the lender let me use the short-term rental income to qualify?
Yes, but with some restrictions: On a refinance, you can only use it if you have two years’ tax returns reporting that type of rental income; it is then averaged for the 24-month period and added to your regular income. But if you are buying a new home and selling your present home, you cannot use rental income from the home you are selling to qualify for the home you are buying, even if you plan to offer your new home for short-term rentals.
Finally, a number of banks will not allow a person who reports this type of income to obtain a HELOC (Home Equity Line of Credit) on their primary residence. Before you sign up for this new venture, check with your broker or bank to see what their rules are for HELOCs.
I welcome questions or comments and can be reached at (864) 235-9596, or by e-mail at Mark@TheGreatestRates.com.
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