The Airbnb lending puzzle

by Andrew Morrell

Short-term rental services like Airbnb and Vrbo have grown vastly more popular in recent years. In response, local regulations have become more stringent in some parts of the country. However, the mortgage lending industry and its public referees have responded to the trend with more accommodation than restriction.

Last year, government-owned mortgage firm Fannie Mae announced the rollout of a pilot program with Airbnb and three mortgage lending companies that would allow homeowners to apply for a refinanced loan, supported by income earned using the service. Quicken Loans, one of the lenders to partner with Airbnb and Fannie Mae in the pilot program, extended similar terms to Vrbo users earlier this year.

Also this year, Fannie Mae released an updated version of its “Second-Home Rider” document to clarify its underwriting policies regarding rental income. Essentially, the new rider confirmed that owners of a second home could rent that property out after a year of ownership, and that Fannie Mae would not classify those homes as investment properties (which require different underwriting standards and often higher interest rates).

The sum of these developments has been positive for homeowners, current and prospective, who hope to earn income through a short-term rental platform. Not only is it possible for homeowners to potentially secure more favorable financing terms on their primary residences if they are renting them out — they also have the same opportunity to do so if they purchase a second home.

Bill Banfield, executive vice president of capital markets at Quicken Loans, said a mortgage refinanced through his company’s partnership with Airbnb or Vrbo could also be ideal for hosts looking to make improvements that will increase a property’s draw for travelers. “These renovations, made possible by the Airbnb and Vrbo partnerships, can allow homeowners to increase the rent for their homes, or even take on more renters if they added a bedroom as part of their renovations,” Banfield said.

This represents a pronounced shift from just a few years ago, when anyone wishing to invest in the burgeoning “home sharing” economy by taking out a conventional second mortgage may have had trouble finding a lender to work with. Because Fannie Mae purchases and securitizes mortgages that adhere to its standards, its recognition of the short-term rental market opens up new opportunities for homebuyers and lenders alike. Lenders are often reluctant to sign off on loans that can’t be resold on the secondary market to Fannie Mae or Freddie Mac, at least not without charging an appropriate risk premium.

This shift in the stance of the lending community is also blurring lines that used to be drawn between a primary residence, a vacation home and an investment property. Under Fannie’s new rider, for instance, homeowners may turn their second home over to a property management company after a year of ownership without breaking the rules. The lender would still need to agree to the arrangement. In the past, second homes purchased for the express purpose of earning rental income were usually required to be financed with a different type of mortgage that carried a higher interest rate, reflecting the understanding by lenders and regulators that a loan on a home other than the borrower’s primary residence was at greater risk of default.

Banfield noted that the official recognition of these new income sources by lenders and federal agencies is a sign of progress for borrowers in general. “The Airbnb and Vrbo partnerships are the first step in allowing additional sources of real, documented income to be considered when qualifying consumers for home financing,” he said. “This is a step in the right direction and I’m sure more sources of income will be added in the years to come as more technology is created to validate those income streams.”

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