A buyer considering a house as a short-term rental may start with two numbers: What can I charge per night, and how often can I rent it? Fannie Mae now has a much more specific calculation in mind.
On September 2, Fannie Mae introduced new guidelines for using short-term rental income when qualifying for a mortgage on a one-unit investment property. The change gives lenders a specific way to evaluate income from properties rented for short stays rather than through a traditional long-term lease. Fannie Mae’s September income-assessment changes
One of the more interesting parts is what isn’t enough: a projected nightly rate. For a purchase, lenders can still use a traditional rent schedule based on long-term rentals. But when short-term rental data is used, Fannie Mae requires validated data from an MLS or property management company. That means three comparable short-term rentals, including not only their rental rates but also the number of days they were actually rented during the previous calendar year. When possible, those comparables should be in the same market area as the property being purchased. Fannie Mae Selling Guide B3-3.8-03
That makes sense when you think about it. A property might rent for $300 a night, but there is a big difference between getting that rate 10 nights a month and getting it 25 nights a month. The nightly rate alone doesn’t tell you what the property actually produces.
Fannie Mae’s calculation goes further. After using the comparable properties to establish monthly gross rent, the lender uses 50% of that amount, with the other 50% accounting for vacancy and maintenance. The property’s principal, interest, taxes, insurance and association dues, or PITIA, are then subtracted. If the calculation leaves positive adjusted rental income, that amount can be used to offset the property’s PITIA. It doesn’t simply get added to the buyer’s salary as additional qualifying income. If the calculation produces a loss, however, that loss has to be included in the borrower’s debt-to-income ratio.
That distinction is important. A short-term rental that looks terrific on a buyer’s spreadsheet may not provide nearly the mortgage-qualification benefit the buyer expects.
There is another wrinkle that hits particularly close to home. Before short-term rental income can be considered under these guidelines, Fannie Mae says the property must be legally permitted to operate as a short-term rental, including meeting applicable local registration and licensing requirements. That matters because those requirements continue to change locally.
This summer, St. Charles County adopted new rules for short-term rentals in unincorporated areas of the county. Operators are required to obtain a business license and the property must pass a safety inspection. The rules also require a local contact who is available around the clock and able to respond to the property within 45 minutes. The county requirements apply to properties in unincorporated St. Charles County, not homes inside individual municipalities, which may have their own rules.
That creates a connection buyers might not immediately make. Whether a property can legally be operated as a short-term rental isn’t just something to investigate after closing. If a buyer plans to rely on projected short-term rental income to qualify under Fannie Mae’s new guidelines, the legality of that use can become part of the financing question too.
The new policy has limits. It applies to one-unit investment properties, and short-term rental income from an accessory dwelling unit isn’t eligible under this provision. Borrowers and properties still have to meet the other requirements of the loan. Fannie Mae introduced the changes September 2 and is allowing lenders to implement them immediately. Lenders are required to have the September rental-income changes in place by November 1. That is an implementation deadline, not an expiration date.
For someone considering a short-term rental purchase, the takeaway is fairly simple: don’t build the investment around the nightly rate alone. Find out what comparable properties are actually producing, whether the intended use is allowed at the property, and talk with the lender about how much of that projected income can actually be used for qualification. The income potential may still make the deal work, but don’t assume your spreadsheet and your lender’s spreadsheet will look the same.
Karen Moeller
STLKaren.com
Karen.McNeill@STLRE.com
314.678.7866
About the Author:
Karen Moeller is a St. Louis area REALTOR® with MORE, REALTORS® and a regular contributor to St. Louis Real Estate News, helping clients make informed, data-driven decisions.