What is better when it comes to a loan for STR, MTR, 2nd home/vacation home?

Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

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Robin SimonBusiness Member

Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes

Quote from @Ruth Schrader-Grace:

Sharing an article published just last year on BP on this exact question:

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

High Level -

-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market

-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)

- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences

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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
2y
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.
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Stacy Patel
Lender · FL · Member since 2024 · 34 posts · 10 votes
2y
Hi Ruth,

For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.

Best, Stacy
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
2y
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.
Hurst Real Estate, INC4.986 Reviews
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Erik EstradaBusiness Member
Lender · Los Angeles, CA · Member since 2022 · 7k+ posts · 1k+ votes
2y
Hey Ruth,
What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it.
You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
2y
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

Sharing an article published just last year on BP on this exact question:

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?
https://www.biggerpockets.com/blog/short-term-rental-loans-a...

High Level -
-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market
-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)
- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences
[email protected]
Harpoon Capital514 Reviews
Website View Page
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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
2y
There isn't a "best" option. There are different products for different buyer situations. Conventional is always going to be the cheapest, but sometimes it doesn't work due to a buyer's financial situation or their desire to keep a property out of their personal name.
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Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Jay Hurst:

Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.

0 Reply
Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Thank you. I can qualify but looking at all options to see what is best.
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
2y
Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best.

In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.
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Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Stacy Patel:

Hi Ruth,

For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.

Best, Stacy

The only thing I'm concerned about is the prepayment penalties with rates coming down. Not sure getting locked into 1-3 years is the best choice.
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Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Erik Estrada:

Hey Ruth,
What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it.
You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.
I agree and have the same concern. And if closing costs are more as well than not sure if DSCR loan is appropriate.
0 Reply
Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Jay Hurst:

Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.

I definitely agree with that.
0 Reply
Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Jay Hurst:

Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best.

In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.

Correct although I do despise all that paperwork but we're talking money here so...
0 Reply
Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Robin Simon:

Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios?

Sharing an article published just last year on BP on this exact question:

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?
https://www.biggerpockets.com/blog/short-term-rental-loans-a...

High Level -
-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market
-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)
- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences

Yes, thank you. There are rules to abide by.
0 Reply
Ruth Schrader-Grace
OP
Homeowner · Key Largo FL and Palm Harbor FL · Member since 2024 · 26 posts · 7 votes
2y
Quote from @Jay Hurst:

Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best.

In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time.
Thank you. It is something to consider.
0 Reply
Kent Kettell
Catlett, VA · Member since 2024 · 80 posts · 5 votes
2y
I agree, DSCR is the best option because it is flexible, but you can always work with someone who can evaluate your situation to find the best option FOR YOU.

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