Mortgage for Airbnb: Introducing DSCR Loans

Finding a suitable Airbnb property is one thing. Finding financing for it is a completely different matter.

One of the major problems real estate investors, both old and new, have to deal with is the lack of good financing options for Airbnbs. Getting short-term rental loans in a traditional way can be challenging, to say the least. That’s why many investors go for the alternative, and choose the DSCR loan for Airbnb, as their primary way of funding short-term rentals. 

In this article, we’ll tell you all there is to know about DSCR loans for short-term rentals. We’ll talk about the main requirements for getting a DSCR Airbnb mortgage, as well as how those differ from traditional loans. We’ll also share with you some particulars about DSCR loans, and we’ll discuss why they are a great option for investing in short-term rentals.  

Let’s start!

DSCR Loan for Airbnb: Things You Should Know

DSCR loans are non-qualified mortgages designed to help US citizens and foreigners buy investment properties in the US. 

Unlike traditional mortgages, DSCR loans can only be used to purchase rental properties. They have different qualification requirements from regular mortgages and are centered on catering to a single target audience — real estate investors.  

To ascertain whether or not to approve a DSCR loan, Airbnb lenders will consider a unique metric called the DSCR score. What precisely is this metric? Let’s discuss it below. 

Airbnb Mortgage: What is a DSCR Score? 

DSCR score is a metric used to determine a property’s ability to generate income (i.e., evaluate the financial potential and health of a specific piece of real estate). When it comes to an Airbnb mortgage, lenders will approve loans for properties that have a DSCR score of at least 1 (or higher). When a property has a DSCR score of 1, it means that it’s capable of generating enough income (via rent) to cover loan payments. 

However, we should mention that some lenders will accept a DSCR score lower than that and that some could ask for a higher score. It all depends on a specific lender.

Note that the higher the DSCR score is, the more cash flow a property is able to create. For 

example, a DSCR score of 1,25 means that the property generates enough income to cover loan payments and other additional expenses that come with it (e.g., various maintenance and repair fees, property management, etc.). 

Now, let’s move on and talk about how you can calculate the DSCR score. 

Airbnb Mortgage: How to Calculate DSCR Score?

The two most popular ways to calculate the DSCR score are:

• Dividing the Net Operating Income (NOI) with the debt service
• Dividing the Gross Income (GI) with the debt service

Out of the two, the first one (the one that relies on NOI) is more widely used and is deemed to be far more precise. 

Just note here that the lenders will usually assume a 30% vacancy rate (or 255,5 days of occupancy) for Airbnb and other short-term rentals. Be sure to take that into account when calculating the rental income of a particular property. 

Don’t let the percentages discourage you; it’s actually really simple. All you have to do is multiply the daily Airbnb cost by 255,5 (instead of multiplying it by the number of days per year or 365).

For example, if the Airbnb you’re interested in buying generates $100 per day, you’ll get the following:

255,5 x $100 = $25,550

$25,550 is the yearly rental income, which, when divided by 12 (the number of months in a year) will allow you to calculate the Gross Rental Income:

$25,550 / 12 = $2,129

Once you have the Gross Rental Income, add it to the DSCR calculator, along with other parameters, to determine the DSCR score of the Airbnb property you’re interested in.

Are you interested in a DSCR loan for Airbnb? Book a free consultation to learn more.  

With that out of the way, it’s time to discuss some of the general requirements for DSCR loans.

DSCR Loan for Airbnb: Main Requirements

One of the most popular Airbnb loans are, in fact, DSCR mortgages. This is primarily due to their versatility and fast closing times. 

Some of the main DSCR loan for Airbnbn requirements include the following:

• A credit score of 620 (Note that some Airbnb lenders will not require you to have a US credit score or history. But will instead, as a way of mitigating risk, ask for a higher down payment);
• A DSCR score of at least 1 (Some lenders will accept a score as low as 0,75, while others will not go for anything less than 1,25);
• A down payment between 15% to 25% (This can be a bit higher or lower, depending on the lender. For example, if you don’t have a US credit score and your property has a DSCR lower than 1, you can reasonably expect them to ask for a down payment of 30%);
• Interest rates between 7,3% and 9,3% (The rates are for April 2024. Note that the DSCR loan interest rates are always changing to follow the latest developments in the financial markets. Apart from that, interest rates can be influenced by the DSCR score, down payment, loan-to-value (LTV) ratio, and more);
• Various financial documents (bank statements, proof of assets, etc. Again, the exact documentation you’ll need will depend on the specific lender);
• Identification documents (A valid passport or Visa for foreign nationals. An ID card for US citizens)

DSCR Loan for Airbnb: Difference Between DSCR and Traditional Loans

There are many key differences between DSCR and traditional loans. To highlight them and make them easier to understand, we’ve put them into several different categories:

Property Types You Can Buy

DSCR loans are investor-only loans mainly used to finance different types of real estate properties that generate income (including Airbnbs). On the other hand, traditional loans can be used for various other purposes, like purchasing a primary residence, vacation home, and more. 

Down Payment Size

Traditional loans usually have a lower down payment requirement than DSCR loans. The main reason for that is that the requirements for traditional loans are much more stringent. They are more difficult to get, and closing times are far longer. Because of that, the lenders of traditional loans can afford a lower down payment (which can range between 3% and 15%). 

On the other hand, DSCR loans have much faster closing times, are available to a wider group of people, and have less strict requirements. Due to all of that, DSCR loan lenders will ask for a higher down payment requirement (usually between 15% and 30%).

Ways to Qualify 

The main way to qualify for a DSCR loan for Airbnb is through a property’s DSCR score. Because the property generates income, it serves as the main collateral for the loan. The higher the score, the better loan terms you can expect to get and the easier it will be to qualify.

Traditional loans are different in that regard. They are much more difficult to qualify for, and the requirements will vary depending on the exact type of loan. 

Interest Rates

DSCR loans, on average, have slightly higher interest rates than traditional loans:

• DSCR loan interest rates 7,3% to 9,3%
• Traditional loan interest rates 6,7% to 7,28%

The main reason for higher interest rates is to give lenders an additional opportunity to mitigate risk but also to make money. At the end of the day, that’s what real estate investment is all about for both lenders and borrowers.

DSCR Loan for Airbnb: Benefits and Downsides

Airbnb investing is a global business. There are many great countries where you can buy an Airbnb property, but none of them come close to the US. Not only does the US have some of the best places for Airbnb with some of the best numbers, but it also offers some of the best financing options to investors.  

A DSCR loan for Airbnb is one of those financing options, and just like anything in life, it has its benefits and downsides. To make it easier to compare them and decide if a DSCR loan is the right option for you, we’ve listed all the pros and cons below. 

The main DSCR loan pros and cons include:

DSCR Loan for Airbnb: Pros

• You can qualify for a DSCR loan without providing extensive personal financial information. If the DSCR score of the property you’re interested in is higher than 1, you’ll be good to go.
• DSCR loans typically have really fast closing times. Instead of spending a lot of time corroborating your personal finances, DSCR lenders will mostly focus on the DSCR score of a particular property. They will calculate it, and if the numbers are right, you’ll get your loan.
• You can invest in multiple properties with a single DSCR loan. There’s no need to pay off a loan for one property before getting approved for the next one. With a DSCR loan for Airbnb, you can finance properties for up to 5 million dollars in accumulated value. 
• DSCR loans allow you to continuously turn equity (which you build by making loan payments) into hard cash. This is a good option if you suddenly need some extra cash flow to cover various property costs (repairs, maintenance, etc.).
• You can apply for and get a DSCR loan through an LLC, which provides an additional level of safety for your personal finances and assets. Note that you can easily open an LLC in the US . 

DSCR Loan for Airbnb: Cons

• DSCR loans have a larger down payment than most traditional loans and can range between 15% to 25% of a property’s value.
• The maximum amount of money you get via a DSCR loan is capped at 5 million dollars. 
• A DSCR loan for Airbnb relies on you actually having regular bookings. If you run into problems and can’t get frequent occupants, you might end up having to dip into your savings to pay off the loan. You can also give up equity and turn it into cash flow to pay off the loan, which is not always going to be an ideal option.