Host Financial Mortgage Rates for Short Term Rentals

I spoke yesterday with a representative from Host Financial about their mortgage program for short term rentals. Unlike convention mortgages, Host Financial provides commercial mortgages for their properties for investors in vacation rentals, STRS, and Airbnbs. The difference is that they underwrite the property based on the property’s financial characteristics, not the owners underlying income and debt levels like a personal mortgage. You do need a good credit score and need money for the downpayment (about 25%) and about 6 months cash reserves put into escrow.

There are a few drawbacks to using a commercial mortgage like Host Financial. First off all the interest rates where about 3 points higher than a conventional interest rate. For a 30 year mortgage in a rural area, the rate i was quoted was around 6.5%. That’s about 3 points higher than a conventional investment loan right now or 3.5% higher than a second home loan. There is also a step down pre-payment penalty for the first 5 years of the mortgage. That means if you pay back the loan early, you pay between 1-5% percent prepayment penalty on the loan balance depending on the year your repay (if you repay right away you pay a 5% penalty). For non-rural areas with good long term rental comps, you might pay about a percentage point lower. If you used floating exchange rate your rate is about 0.25% less as well. Fees on a $400K mortgage were around $12,500. You can also buy down the rates with paying points up front.

So, if you can’t get a conventional mortgage, but have a killer deal, Host Financial seems like a good option for financing a vacation rental. They care more about how that property is going to perform than your debt to income level. The mortgage rates on commercial loans tend to be higher, but sometimes that’s what you need to do to get the deal done.