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Airbnb Income: How It Can Mess With Your Mortgage ‘Refi’

Room-rental services such as Airbnb Inc. are blurring the line between residential and commercial property. That is causing problems for some homeowners looking to refinance mortgages. (Read what Airbnb hosts need to know.)

Big banks including Bank of America Corp. and Wells Fargo & Co. are subjecting some refinance customers who rent rooms to additional scrutiny. Some borrowers have been told they were no longer eligible for certain kinds of loans or would have to pay higher interest rates, according to the customers.

“This is kind of novel,” said Jeffrey Naimon, a consumer-finance attorney and partner at law firm BuckleySandler LLP. “I don’t think the market has gotten its arms around it.”

The issue for lenders is how to classify loans in the Airbnb age. Historically, that has been easy: A house usually was either a principal residence or an investment property. Mortgages on the latter are often viewed as riskier because owners had less of a personal connection to the house and rental income isn’t always reliable.

Now, the distinction isn’t so clear-cut. Online-rental services are spreading rapidly; Airbnb’s website had 455,223 active listings in the U.S. as of July, up 80% from a year earlier, according to research firm YipitData. That is posing challenges to lenders and frustrating some customers, illustrating how fast-paced technological change can reverberate in unexpected ways.

The issue comes up when borrowers report income from services such as Airbnb when applying for a new loan, often in hope of improving their credit profile. That, they hope, can lead to a better interest rate on a loan.

Brad Severtson, a resident of Seattle’s Ballard neighborhood, earned roughly $30,000 last year from renting out a cottage in his Victorian home’s backyard. He thought that would work in his favor when he applied in early 2016 to refinance a home-equity line of credit at Bank of America.

The bank turned him down, saying it didn’t allow home-equity lines of credit on properties in which the homeowner is operating a business, including Airbnb. Mr. Severtson, a 61-year-old data scientist and former Rhodes scholar, was taken aback.

“Here’s a bank I’ve had a relationship with for 30 years,” he said. “The assumption to me was the more your income is, the less risk to them. That assumption was wrong.”

Mr. Severtson ultimately refinanced with Umpqua Holdings Corp., a Portland, Ore.-based bank.

A Bank of America spokesman said the bank doesn’t provide home-equity lines of credit on investment properties.

He said the bank would consider a customer’s primary residence an investment property if there was a “material amount of commercial activity,” but that “incremental renting” wouldn’t be an issue.

A spokesman for Airbnb said such incidents “are incredibly rare.”

Mortgage lenders typically apply tougher underwriting standards, including larger down payments and higher rates, to second homes or investment properties that owners don’t live in for most of the year.

For mortgages made this past April that went toward the purchase of a home, lenders on average were willing to finance 84% of a property’s value if the borrower intended to live there, according to data from real-estate analytics firm CoreLogic Inc. The average interest rate was 3.76%. For investment properties, lenders only financed 72% of the home’s value, on average, and charged an average interest rate of 4.29%.

That is because borrowers have shown a greater propensity to default on investment-property loans. Cumulative losses on investment-property loans included in private-label mortgage bonds issued in the four years before the financial crisis reached nearly 20% in early 2016, according to data from Moody’s Investors Service and ABSNet Loan. For owner-occupied mortgages, the loss rate was about 14%.

An additional worry: Defaults can trigger requests from mortgage investors and government agencies for a lender to repurchase the loan. So, many lenders proceed with caution when a loan doesn’t fit neatly into a predefined category, although that is less true for “jumbo” mortgages on high-price homes that often stay on bank balance sheets.

For mainstream lenders in the postcrisis mortgage world, “the last thing they want is someone coming back to them later” with a request to repurchase soured loans, said Christopher Mayer, a professor of real estate at Columbia Business School.

That, though, can cause issues for some borrowers. Stephen Labovsky this spring applied to Wells Fargo to refinance the mortgage on his home in San Francisco’s Glen Park neighborhood.

Mr. Labovsky, 72, and his wife were active Airbnb hosts and had registered their property with the city government. That permits them to rent space for an unlimited number of nights a year while they reside in the home and for no more than 90 nights when they aren’t on the premises.

But because the couple were operating short-term rentals for much of the year, Mr. Labovsky said, Wells Fargo recommended he apply for a mortgage as if his home were an investment property. That would have increased the interest rate by up to 0.5 percentage point, he said. Mr. Labovsky, a retired filmmaker, stuck with his existing mortgage.

Greg Gwizdz, national sales manager for Wells Fargo’s mortgage division, said the bank has no policy of restricting short-term rentals on its borrowers’ properties.

He said that services like Airbnb haven’t caused changes in the bank’s position on what constitutes a primary residence or an investment property.

Still, he acknowledges there may be confusion within the industry offering hosts free, primary liability coverage. Similar questions were raised a few years ago about whether homeowners’ traditional insurance policies would also apply to their Airbnb activity. The startup eventually responded by offering hosts free, primary liability coverage up to $1 million per incident.

In the case of mortgage refinancing, though, banks will likely have to gain more experience with Airbnb hosts.

“Some of the programs that are new that allow people to rent out their properties short term or in different ways that may not have existed 10 years ago may not be fully understood by every lender across America,” Mr. Gwizdz said.

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