Issue Refinancing Duplex with STR due to FNMA Eligibility Reqs

[Ray Collins]

Hello!

Long time BP-listener, first time forum-poster here. I tried searching the forums for a similar thread, but I couldn't find anything on this specific topic. Not sure if this is the right sub-forum to post to -- please redirect me as necessary!

Background:

I own a duplex – I live in 1 unit year-round and rent out the other unit as a STR via Airbnb. I've been permitted by the city and operating for the last 2.5 years.

Problem:

I've been trying to refinance the property – the refinanced loan would be around $300k. Recently I hit a snag in the process: my contact is telling me that Fannie Mae classifies "bed and breakfast properties" as ineligible property types, and therefore my property is ineligible for refinance through their company.

Question:

Are STRs legitimately considered "bed and breakfasts" in the eyes of Fannie Mae, meaning that I cannot obtain a refinanced loan backed by Fannie Mae? Has anyone else had this problem, and it there a way around it?

Additional Notes:

I've dug through the Fannie Mae selling guide and related articles, but I can't find a clear understanding of the definition of "bed and breakfast property." I did find a Fannie Mae article detailing the rationale of classifying "bed and breakfast properties" as ineligible: "Fannie Mae purchases and securitizes mortgage loans secured only by properties that are primarily residential in nature. Boarding houses and bed and breakfast properties are not primarily residential in nature and therefore are not eligible." The property is zoned as residential, and I live year-round in a unit on the property that occupies >50% of the livable area. Am I missing something -- why would my property not be considered primarily residential in nature/why would it be considered a bed and breakfast property?

I did also clarify with my contact that the issue is not around whether or not STR income can be used in my application for the refinance – the issue is purely related to the property eligibility requirements through Fannie Mae. My DTI without the additional income is not the concern.

Any insight would be greatly appreciated!

[Ray Collins]

Update in case anyone runs into a similar situation in the future:

I emailed the following to the loan officer.  The information was forwarded to the underwriting team, and I was subsequently reassigned a new loan officer. Today we finally set a closing date!

Thanks to all who provided input, it was greatly appreciated.

"...

The subject property is not a “bed and breakfast property.” The property is primarily residential in nature, and less than half of the property functions as a short-term rental.

Facts validating that the property is residential in nature:

- The property is zoned as residential.

- I hold my homestead exemption on this property.

- I live at this property throughout 100% of the year.

- The square footage of my personal living space is greater than the square footage of living space associated with the Short-Term Rental.

Facts validating that the property is not a “bed and breakfast property”:

- The property is not zoned as commercial.

- Neither breakfast nor any other meals are provided to guests.

- I maintain a Short-Term Rental permit with the city for the STR unit; I do not maintain, nor does the city require me to maintain, a Bed and Breakfast permit.

This section of Fannie Mae's Selling Guide is primarily related to the qualification of income from Short Term Rentals, but it mentions the capability of income from a STR unit on the property to be used for a refinance of the property (Can rental income that is generated from short-term rentals be used to qualify? (fanniemae.com)). It also uses the term “short-term rental” in this section, indicating that it is a different term from “bed and breakfast property.”

“Can rental income that is generated from short-term rentals be used to qualify? Rental income derived from the subject property is acceptable on a two- to four-unit principal residence in which the borrower occupies one of the units, or a one- to four-unit investment property.” … “If the transaction is a refinance, rental income may be used when reported on the borrower’s individual tax returns (Schedule E).”

"