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Home » The low-tier housing shortage and obstacles to refinancing short-term rentals

The low-tier housing shortage and obstacles to refinancing short-term rentals

Putting your home on Airbnb, Flipkey, or HomeAway? Keep in mind that making your home available for short-term rentals can confuse mortgage lenders as to how to properly categorize your home.  

Does the home serve as your primary residence?

An increasing number of lenders have put homes that actively double as short-term rentals under scrutiny. Renting out your home through any of the popular services mentioned earlier can cause banks to classify you as “operating a business” in your home and in turn categorize your residence as investment property.

Even if you live in your home while you rent out the other rooms, the property may not receive a primary residence designation and as a consequence you may be faced with a higher down payment and mortgage rate when you refinance.

And if you don’t reside on the property, lenders might not be as willing to loan against the home – borrowers who don’t live in their homes default on their mortgages at a higher rate than those who do.

This added risk translates to a higher interest rate for investment properties. This is an added cost you might be forced to face just because lenders will make the mistake of thinking that you are trying to refinance an investment property and not a principal residence.

The rules for categorizing homes as investment property, principal residence, or otherwise differ from lender to lender. A lender may classify your home as investment property if you rent it out for a certain number of days each year or if you earn a certain amount of money from short-term rentals.

This is why it’s advisable to shop around for multiple mortgage lenders in order to get approved for a rate that is acceptable.

Is the income being reported and is it legal?

Many lenders are uncertain as to whether or not funds generated from short-term rentals can be factored into a mortgage application. They will want to determine if the rental income is being reported on your tax returns. It usually doesn’t count if it is not being reported.

If you do report your rental income, it might be tax exempt, depending on the number of nights the property was rented. To be sure, consult with a tax professional.

There’s also the question of legality, whether or not your rental income has been legally obtained. Mortgages are long-term financial obligations that typically last 15 to 30 years and lenders like to see a steady stream of income. But if you are using unlicensed short-term rentals, there is the threat of your rental income getting cut off when a neighbor has you reported.

Laws vary from city to city throughout California, although virtually every city in the state imposes tax on transient rentals – Indio in Riverside County for example, has begun to regulate short-term rentals by requiring licenses and taxes, while Ojai has banned them altogether.

Santa Monica laws require you to live on any property that you list for short-term rentals. San Francisco laws require you to have a business license and you may only rent out the property 90 days out of the year unless you live in the home that you list for short-term rentals.

Likewise, check with your homeowners’ association (HOA) – when you purchase property in a neighborhood with a HOA, your use of the property is subject to covenants, conditions and restrictions (CC&Rs).  

CC&Rs often forbid the operation of any business within a residential community, so renting out your home can result in penalties and legal action.