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What Types of Airbnb Loans Are Available?

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Airbnb loans offer a way to fund investment properties without paying cash. Airbnb is an online hospitality platform that allows homeowners to list extra rooms — or their entire house — for travelers to book by the night.

If you’re buying property to use as an Airbnb, and you’re not planning to live in it yourself, you’re purchasing an investment property — which can be a bit more challenging to finance than an owner-occupied home.

6 types of Airbnb loans

The best option for buying property for an Airbnb depends on your financial situation, whether you have equity in your current property and personal preferences. Here are six Airbnb mortgage options.

1. Conventional loan

A conventional loan is one that’s not part of a specific government program. Many of these loans are backed by Freddie Mac or Fannie Mae, which are government-sponsored enterprises (GSEs). In other words, they’re government-backed, but not part of a specific government program like VA or FHA loans.

Conventional loans for investment properties like Airbnbs have higher down payment requirements and credit score minimums, and also require you to have cash reserves to cover vacancies and maintenance costs.

  • 15% to 25% down payment requirement
  • 640 or higher credit score depending on your down payment amount
  • Six months of cash reserves

2. Cash-out refinance

Coming up with the required down payment for an Airbnb loan can be a challenge. One way is to tap into your home equity, and a cash-out refinance is a relatively simple option for doing that.

With a cash-out refinance, you replace your current mortgage with a new one. The new mortgage is more than the amount you owe, giving you cash to put down on an investment property.

  • Typically limited to 80% of your home’s value
  • Closing costs of 2% to 6% of your loan amount
  • Conventional cash-out refinances required a credit score of at least 620

3. Home equity loan

Another option for buying property for an Airbnb is a home equity loan. With a home equity loan, you get a lump sum of cash and make monthly payments during a fixed term.

A home equity loan is secured by your home, and takes second position after your mortgage. This makes it riskier for lenders, which means the interest rate is generally higher than it would be for a cash-out refinance or purchase mortgage. You can typically borrow up to 85% of your home’s value less the balance of your mortgage.

  • Typically has a payoff term of five to 30 years
  • Closing costs of 2% to 5% of your loan amount
  • Requires a credit score of 620 or higher

4. Home equity line of credit

A home equity line of credit (HELOC) also allows you to tap into your home equity, which you can use as a down payment on an Airbnb loan. Instead of receiving a lump-sum payment, you have access to a credit line.

HELOCs have two phases: the draw period and the repayment period. The draw period is when you can borrow against your credit line. You can use as much or as little of your credit line as you like during the draw period, which typically lasts 10 years. And while you do have to make payments on the HELOC during the draw period, they are often interest-only payments.

After the draw period, the HELOC enters the repayment period, which usually lasts 15 to 20 years. You must pay back what you’ve borrowed during your repayment period, and you can no longer borrow against your credit line.

HELOCs are also secured by your home and take second position after your mortgage.

  • Typically has a variable interest rate
  • May be required to pay annual maintenance and membership fees
  • Requires a credit score of 620 or higher

5. Hard money loan

Hard money loans are short-term loans issued by a private lender, backed by real estate and generally used for investment purposes.

An advantage of hard money loans for buying an Airbnb is the possibility of helping you buy a property traditional loans won’t, such as that treehouse in the woods you had your eye on. In addition, approval can sometimes be faster.

While each lender is different, a borrower’s credit score isn’t usually a huge determining factor with hard money loans. On the downside, interest rates can be high and so can the origination fees. The repayment period is also typically short, sometimes only as long as one year.

  • May require a down payment of 30% or more
  • May have a prepayment penalty
  • High closing costs
  • May require two appraisals

6. Personal loan

Personal loans are unsecured, and they have relatively high interest rates; as such, many lenders don’t allow you to use personal loans for a down payment. They also tend to have shorter repayment periods, so they’re not the best option for buying a house for an Airbnb.

  • Relatively high interest rates
  • Shorter repayment periods
  • Not accepted for a down payment by most lenders

Airbnb financing: 5 things to consider

There’s more to buying property for an Airbnb than loans. Here are some other considerations:

  • Is it legal? It’s important to know if Airbnb is allowed where you want to buy, as some cities have strict rules for short-term rental properties. For example, in many buildings in New York City, it’s illegal to rent out a property for less than 30 days. Richard Barenblatt, a mortgage specialist with New York-based GuardHill Financial Corp., recommends speaking to a real estate attorney experienced in landlord-tenant law to ensure you’re complying with the laws in your area.
  • Do you have the appropriate insurance? Airbnb offers its own Host Protection Insurance that can help with damages, but your homeowners insurance may require you to have additional coverage when renting out a property. It’s best to discuss this with your insurance company to get all the details.
  • How much Airbnb income should you expect? Research comparable Airbnbs in your area to get a sense of how much they typically rent for and how often they’re rented out. Compare these numbers to your financing options.
  • How much will running an Airbnb cost? In addition to cleaning and maintenance, keep in mind that Airbnb charges a fee to host. The company’s site says this fee is usually around 3%, but can be higher for hosts with Airbnb Plus and those with properties in Italy, as well as in cities with a “Super Strict cancellation policy.”
  • Is it convertible to a long-term rental? What if the laws change in your area and Airbnbs are no longer allowed? Barenblatt recommends considering the potential for converting to a long-term rental when you’re looking at properties: “You want to diversify your risk,” he says. “Being an investment property, I would always do research [to find out] what the rental comps are in the area,” says Barenblatt. This gives you an idea of how much you could potentially earn if you can’t use the Airbnb revenue model. A real estate agent can assist you with finding comparable properties.

FAQs about Airbnb loans

Can you include Airbnb income to qualify for an Airbnb loan?

It depends on the lender. Some will allow 75% of your rental income to count toward qualifying for a loan, while others won’t count rental income at all.

Notably, Airbnb has a special program to help you refinance a primary residence you’ve been using as an Airbnb, and you could use the proceeds to finance a new property.

Is there an option for buying a house for an Airbnb that doesn’t require a down payment?

You typically can’t buy an investment property without a down payment. There’s more at risk for lenders if they’re loaning money for homes that aren’t a primary residence — it’s easier for you to let go of the property since you don’t live in it. As such, lenders compensate for additional risk by requiring a higher down payment.

Can you use FHA loans to buy a property for an Airbnb?

The Department of Housing and Urban Development, which oversees the FHA, doesn’t allow multifamily residential units to be rented for less than 30 days at a time or to be used for “transient or hotel purposes.” An Airbnb would qualify as using the home for “transient or hotel purposes,” so you may be violating the terms of your loan agreement if you use a home purchased with an FHA loan as an Airbnb.

FHA single-family homes are restricted to those who plan to use the home as a primary residence. You may be able to rent it out after living in the home for one year in certain circumstances, but only on a long-term basis.

How much more are investment property loans than primary residence loans?

Typically, investment property rates are 50 to 87.5 basis points higher than primary homes. For example, if owner-occupied homes have an interest rate of 3.00%, an investment property may have a rate of 3.50% to 3.875% for the same mortgage term.

 

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