Short-term rental sites such as Airbnb have changed the game for homeowners. Renting out your entire home—or part of it—is an attractive way to make extra cash. In fact, some developers are even building homes aimed at first-time home buyers with separate bed-and-bath areas designed to be rented out—a twist on the classic in-law suite.
But how does your plan to host short-term renters play out when you’re applying for a mortgage? Rent money will increase your yearly earnings, but do lenders count future revenue as income? Can plans to maintain a short-term rental help you get a mortgage?
For the most part, no. Stephen Rybak, senior managing director at GuardHill Financial Corp., says a lender will never consider potential income from renting out part of a single-family home. And it doesn’t matter if we’re talking about a space that’s detached from the house (e.g., a garage apartment, studio, or casita)—it’s all technically part of a one-family home.
“If it’s not zoned for a two-family, you’re never going to get credit for that from a lender,” he says.
You will, however, be able to include part of your potential rental income if you are buying a building zoned for two or more families. Whether it’s a townhouse, brownstone, or free-standing home with multiple units, the building needs to be a legal two-family dwelling.
Zoning laws vary by city and state, so if you’re considering this kind of building, talk to your real estate agent or lawyer to ensure that the building is a “true” or “legal” multifamily property. The type of building will also be indicated on the listing.
How a lender decides what your rental is worth
In a two-family or multifamily home, the market-rate rent for each unit is determined during the appraisal process.
“The appraiser will give you the market value,” says Rybak, “and the bank will consider 75% of that amount to help you qualify for the loan.”
So if you’re buying a two-family home and the appraiser puts the fair market rent for your unit at $1,000 a month, you’ll get $750 a month, or $9,000 a year, added to your income. That will allow you to qualify for a bigger loan than you otherwise would have been able to get—regardless of what you actually end up making on the rental.
Could short-term rentals hurt your ability to refinance?
Just because the bank won’t consider income from a short-term rental in a one-family home doesn’t mean you shouldn’t do it. Renting out your place is still a great way to help pay your mortgage.
However, keep in mind that, in rare situations, having an active short-term rental could hurt your ability to refinance. If your lender decides that you make enough money from your home to qualify as a commercial or investment property, it could deny your refinance application or charge you a higher interest rate. That means the $30,000 you make a year renting out theº cottage behind your home could disqualify you from refinancing the whole property. In this situation, a bank could consider you to be operating a business out of your home.
That kind of issue is rare, though. So if short-term rentals are legal in your city, and you don’t mind taking on the responsibilities of being a property manager, a supplemental income—potentially thousands of dollars a year—is nothing to sneeze at.
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