DSCR Loan for Airbnb: How It Works & How to Get It

a couple considering a DSCR loan for Airbnb to purchase a vacation rental property

Are you looking to start your own Airbnb business? Well, that’s great! The popularity of short-term rentals has skyrocketed in recent years, and it’s no surprise why. Not only does it provide you with decent passive income, but it also allows you to meet new people and show off the unique aspects of your property.

However, like any business venture, purchasing a vacation rental requires a significant amount of capital. This is where a DSCR loan for Airbnb comes into play.

If you’re still not familiar with this financing option, we’ll break it down for you in this article and help you understand how it works and how to get it!

What Is a DSCR Loan for Airbnb and How It Works?

At its core, a DSCR loan for Airbnb is a type of financing product specifically designed for individuals looking to purchase or refinance a rental property that will be used as an Airbnb. DSCR stands for “debt-service coverage ratio”, which refers to the measure of a property’s ability to cover its debt obligations. In simpler terms, this loan looks at the property’s potential rental income and compares it to the expenses associated with owning and operating it, including mortgage payments, taxes, insurance, and maintenance costs.

What is the minimum DSCR for a loan?

To qualify for a DSCR loan, you typically need a minimum debt-service coverage ratio of 1. This means that your property’s potential rental income must be at least enough to cover the expenses associated with running your business, especially the monthly mortgage payments. Of course, a higher ratio is always preferred as it indicates a stronger financial position for you as the borrower.

Once you’re approved for a DSCR loan, you’ll receive a lump sum of money that can be used to purchase or refinance your rental property. This loan is typically structured with a fixed interest rate and a longer repayment term compared to traditional loans, allowing for lower monthly payments.

Why Are DSCR Loans the Best Financing Solution for Building Airbnb Businesses?

a person receiving good money through a DSCR loan for Airbnb

There are several reasons why a DSCR loan is the ideal financing solution for those looking to start an Airbnb business.

Quick Application Process

The application process for a DSCR loan for Airbnb is relatively quick and straightforward. Unlike traditional loans, this type of financing doesn’t require extensive financial documentation or credit checks, making it easier and faster to get approved.

Generally, you’re only required to provide information on the DSCR of the property and a down payment. This makes it a great option for those who may not have a well-established credit history or have difficulty obtaining traditional loans.

Favorable Loan Terms

One of the major advantages of DSCR loans for Airbnb is that they offer favorable loan terms compared to traditional loans. As mentioned earlier, these loans typically come with a longer repayment term, which means lower monthly payments and more flexibility in budgeting your business expenses.

Additionally, DSCR loans often have fixed interest rates, so you won’t have to worry about fluctuations in your monthly mortgage payments. This allows for better predictability and stability in managing your business finances.

Higher Loan-to-Value (LTV) Ratios

Along with favorable loan terms, DSCR loans also offer high loan-to-value (LTV) ratios, which refer to the percentage of the property’s value that can be borrowed through a loan. For example, if you have a $500,000 property and the lender offers an 80% LTV ratio, you can borrow up to $400,000.

Higher LTV ratios mean that you can secure larger loans and potentially purchase more expensive properties. This is especially beneficial if you’re looking to invest in high-demand Airbnb locations with higher property values.

No Need for Proof of Employment or Personal Income

Unlike full doc loans, DSCR loans don’t require proof of employment or personal income. This is because the lender mainly looks at the potential rental income of the property and your debt-service coverage ratio. This makes DSCR loans a great option for self-employed individuals, freelancers, or those with non-traditional sources of income who may have difficulty obtaining traditional loans due to stricter underwriting guidelines.

Ability to Finance Several Properties

Most traditional mortgage loans are limited to financing one property at a time. However, with DSCR loans for Airbnb, you can finance multiple properties simultaneously. This allows you to expand your business and maximize your earning potential.

For example, if you want to purchase properties in different locations or need additional funds to renovate and improve your existing properties, a DSCR loan can provide the necessary financing. As long as you have a strong DSCR, you can secure the funds needed for your business.

Better Cash Flow Management

With a DSCR loan, it can be easier to manage your cash flow as a business owner. Since the monthly payments are usually lower than traditional loans, you’ll have more flexibility in budgeting for your expenses and can potentially save money for future investments.

Ability to Refinance

Yes, it’s absolutely possible to refinance an existing Airbnb property with a DSCR loan. In fact, many borrowers opt for this type of financing when they want to lower their monthly mortgage payments or extend their repayment terms. This can help improve your cash flow and also allow you to potentially secure additional funds.

Ease of Scaling

As an Airbnb owner, the time will come when you’ll need to scale your business to keep up with increasing demand. With a DSCR loan, scaling becomes easier and more manageable.

As mentioned earlier, you can finance multiple properties simultaneously, allowing you to expand your business without worrying about financing constraints.

How to Get a DSCR Loan for Airbnb?

Applying for a DSCR loan for Airbnb only requires a few steps to get you on your way to financing your business. Here’s a quick guide you can follow.

Step 1: Contact the Lender to Schedule a Pre-Approval

To start the process of applying for a DSCR loan for Airbnb, you’ll need to contact the lender and schedule a pre-approval. This is an essential step that will help give you an idea of how much financing you can secure and what terms may be available to you. During this step, the lender will ask for information about your property’s potential rental income and your debt-service coverage ratio. They’ll also discuss the requirements needed to move forward with the loan application.

Step 2: Submitting Your Loan Application

After you’ve gone through the pre-approval process, it’s time to submit your loan application. The lender will ask for information about your property, such as its location, size, and potential rental income. They’ll also request documentation on the DSCR of the property and a down payment.

How is the DSCR calculated for housing loans?

The DSCR is calculated by dividing the property’s annual net operating income (NOI) by its total annual debt service. The NOI refers to the income generated from the property, while the total annual debt service includes the principal and interest payments on the loan, as well as any other debts related to the property, such as taxes and insurance.

Step 3: Underwriting and Approval 

Once you’ve submitted your loan application, the lender will review all of the information provided and assess your eligibility for the DSCR loan. If everything checks out, you’ll receive approval for the loan.

Step 4: Closing on Your Loan

After approval, the final step is to close your loan. This involves signing all necessary documents and paying any applicable fees. Once this is done, you’ll receive the funds for your Airbnb business!

Airbnb DSCR Loan Requirements

investor preparing the requirements for a DSCR loan Airbnb owners use

Before you apply for a loan, it’s best to be prepared to increase your chances of approval. Here are some common Airbnb DSCR loan requirements that you should be aware of.

DSCR of at Least 1

While 1 is an acceptable DSCR, most lenders prefer a ratio of at least 1.2 or higher to ensure that you have enough cash flow to cover your expenses and maintain a profitable business.

Down Payment of 20% to 25%

A DSCR loan Airbnb owners get typically requires a down payment of 20% to 25%. However, some lenders may offer financing with a lower down payment requirement, so don’t hesitate to negotiate.

Credit Score of 680

Creditworthiness is always a factor when it comes to securing financing. As for a DSCR loan, a credit score of 680 or higher is usually required.

Other Documents That Will Strengthen Your Application for a Better Loan Deal

  • Property Appraisal Report – This provides lenders more confidence in financing your property as it details the market value of the property.
  • Proof of Cash Reserve – This is important to show that you have enough cash reserves to cover unexpected expenses.
  • Business Plan – This shows that you have a solid understanding of your Airbnb business and its potential for success. It should include information on your target market, marketing strategies, financial projections, and more.

Apart from this, it will be advantageous for you if you have experience in managing rental properties or have a history of successful businesses.

Airbnb DSCR Loan FAQs

Q: What is a good DSCR loan?

A: A good DSCR loan should be able to cover your expenses and generate enough cash flow for your business while maintaining a healthy debt-service coverage ratio.

Q: What if DSCR is more than 1?

A: You’ll be able to enjoy better terms and higher loan amounts if your DSCR is more than 1.

Q: What is the minimum DSCR for Freddie Mac?

A: The minimum DSCR for Freddie Mac is 1.25 for the first mortgage and 1.15 for any subordinate mortgages. However, these standards may vary depending on the lender and property type. 

Q: What is the average DSCR?

A: The average DSCR for commercial loans is typically between 1.1 to 1.5, but again, this can vary depending on the lender.

Q: What is the difference between DTI and DSCR?

A: DTI (debt-to-income) ratio looks at your overall debt compared to your income, while DSCR focuses on the specific property’s cash flow and expenses. Lenders often use both ratios in their loan approval process.

Get a DSCR Loan for Airbnb Now!

So, are you ready to kick-start your short-term vacation rental business? Let the Mortgage Shop help you with finding the best DSCR loan for Airbnb owners. With our expertise and experience, we can guide you through the process of obtaining financing and getting your venture off the ground.

Contact us today for more information!

Brenna Carles

Brenna Carles

I help people who want a place to call their home, where memories can be made, and stories to be shared. Where i can help clients build generational wealth for years to come. I provide the perfect combination of southern hospitality and relentless knowledge and passion for mortgage lending as if you were family.