The mortgage industry is finally catching up to the sharing economy, though in limited numbers. Fannie Mae is starting to allow lenders to let Airbnb hosts use rental income to refinance their home mortgage loans.
Before this recent change, big banks and other lenders would often hold a customer seeking a mortgage refinance to more stringent requirements if part of their income came from renting out their home.
Rental income — especially from Airbnb where it can be high in the summer and low in the winter, or change from week to week — isn’t reliable, the thinking went. Some lenders then charged higher interest rates or disqualified customers from mortgage refinancing if they wanted to include rental income in their application.
Fannie Mae, a federal agency that buys and guarantees home loans, is presently the only agency allowing lenders to count home rental income as qualifying income on home loan refinance applications. Borrowers can get a lower interest rate by refinancing, and can choose to cash out some of their equity through the refi for renovations, college or other expenses.
What used to be considered an unsteady side gig is now a sign of stability, says Evan Tarver, who owns a condo in Austin that he rents out through Airbnb for about eight months a year while renting an apartment in Los Angeles.
“Airbnb clearly has staying power,” says Tarver, editor of real estate investing at FitSmallBusiness.com.
He bought the Austin property about a year ago, so it’s too early to refinance his mortgage, he says, though the mortgage refinance income change is getting Tarver to consider it. “I’ve been thinking about it, definitely,” he says.
Previous mortgage refi rules
While so far only three lenders are allowing Airbnb income to be considered when refinancing a home loan on a primary residence, others often only allowed rental income to be considered on commercial property loans, says Emanuel Santa-Donato, director of capital markets at Better Mortgage in New York City, one of the three lenders working with Airbnb and Fannie Mae.
A commercial property loan could require the house to be classified as an investment property, leading to higher mortgage rates and different loan terms. Investment properties are considered riskier by banks.
It took years for regulatory boards such as Fannie Mae to determine that Airbnb rental income could help pay a mortgage, says Nate Masterson, finance manager at Maple Holistics.
“After the housing crash in 2008, lenders took a very stiff approach on deciding how much money someone could take out on a loan and also had to ensure that they had the financial capability of actually repaying that loan,” Masterson says.
Airbnb has become a success and “is now widely considered a powerful tool for economic empowerment among homeowners,” he says, making it easier for lenders to accept it as an additional form of income to refinance a home loan.
Potential to expand
The new regulations require at least one year’s worth of Airbnb income to be eligible for this refinance option, and only from a primary residence. With one year of Airbnb income, they can use 75 percent of it to qualify, and two years of Airbnb income allows borrowers to count 100 percent of it toward their total income, Santa-Donato says.
A key to the rule change is the verification Airbnb provides to Fannie Mae, instead of relying on Airbnb hosts to come up with proof on their own. Airbnb now provides lenders with a “proof of income statement” that other home sharing sites such as VRBO don’t, he says.
“This is a model for homeowners wanting to think about lending going forward,” says Santa-Donato, who expects other sharing economy income such as from Uber and Task Rabbit to be allowed someday on home refinances.
“We think there’s a lot of potential to use this for other services in the gig economy,” he says.
Instead of counting rental income against them, as some lenders still do, the Airbnb income can lead to a lower interest rate on a home refinance because it’s extra income that lowers their debt to income ratio, which is important to Fannie Mae, Santa-Donato says.
Since launching the program in early February, Better Mortgage has had 5 percent of its new customers include Airbnb income on their home mortgage refinance applications, he says.
They have an average Airbnb income of $48,000 per year and take out $150,000 in a cash-out refinance. The average loan amount for a customer with Airbnb-included income is $335,000.