Picturesque Colorado mountain home, perfect for an Airbnb or VRBO rental, with a serene pond.

Colorado’s stunning landscapes, vibrant cities, and thriving tourism industry make it a prime location for short-term rental investments like Airbnb and VRBO. However, investors often hit a roadblock when it comes to financing: how do traditional lenders view that fluctuating, non-traditional income? The good news is, yes, you absolutely can use a Non-QM loan to qualify with rental income from short-term rentals – and it’s a game-changer for savvy investors in our state.

The Challenge: Why Traditional Loans Don’t Like Short-Term Rental Income

Conventional mortgages (Qualified Mortgages or QM) are designed for stable, predictable income, typically verified with W2s or two years of consistent tax returns for

individuals. Short-term rental income, by its nature, can be seasonal and variable, making it challenging to fit into these rigid underwriting guidelines. Lenders often require lengthy histories of profitability and may not consider it “stable” enough for a standard loan.

The Solution: Non-QM Loans, Especially DSCR Loans

This is where Non-QM loans step in. Unlike traditional loans, Non-QM lenders have the flexibility to look beyond conventional income documentation. For short-term rentals, the most common and powerful Non-QM solution is a Debt Service Coverage Ratio (DSCR) loan.

A DSCR loan qualifies you based on the investment property’s potential to generate income, not your personal income or debt-to-income (DTI) ratio. Lenders look at the property’s projected gross rental income (often based on an appraisal’s rental analysis, which can include short-term rental projections) and compare it to the property’s proposed monthly mortgage payment (principal, interest, taxes, insurance, and HOA dues).

  • What is DSCR? It’s a ratio: Gross Rental Income / Debt Payment. A ratio of 1.0 or higher (e.g., 1.25) typically indicates the property’s income is sufficient to cover its expenses, qualifying it for the loan.

Key Aspects of DSCR Loans for Colorado Short-Term Rental Investors

  • No Personal Income Verification: For many DSCR loans, you won’t need to provide W2s, pay stubs, or even personal tax returns. This is a huge relief for investors and self-employed individuals whose personal income might not easily fit traditional lender guidelines.
  • Property-Based Qualification: The focus shifts entirely to the investment property’s ability to generate income. This allows investors to scale their portfolios without their personal DTI becoming a barrier.
  • Occupancy: DSCR loans are specifically for investment properties (non-owner occupied).
  • Down Payment: While requirements vary, DSCR loans typically require larger down payments than owner-occupied conventional loans, often starting from 20% to 30%.
  • Credit Score: A good credit score is still important for favorable terms, though Non-QM lenders can sometimes be more flexible than traditional ones.
  • Appraisal & Rental Analysis: The appraisal will be crucial, often including a detailed rental analysis that considers the property’s potential as a short-term rental.

Benefits for Colorado Investors with Short-Term Rentals

For investors looking to capitalize on Colorado’s booming tourism and housing markets, DSCR loans offer incredible advantages:

  • Unlock Financing: Access capital for properties that wouldn’t qualify under traditional income verification rules.
  • Expand Your Portfolio: Qualify for multiple investment properties based on their cash flow potential, rather than your personal income limits.
  • Streamlined Process: Often a quicker and less documentation-intensive process compared to traditional loans for investors.
  • Capitalize on Colorado’s Tourism: Finance properties in prime short-term rental locations, from mountain towns to urban centers like Denver and its surrounding communities.

Important Considerations for Short-Term Rentals in Colorado

While Non-QM loans offer flexibility, it’s vital to:

  • Understand Local Regulations: Colorado cities and counties have varying and often strict regulations regarding short-term rentals (e.g., Denver, Summit County, Steamboat Springs). Always research and comply with local zoning and licensing requirements.
  • Evaluate True Profitability: Ensure your property’s actual and projected income truly supports the debt, even with seasonal fluctuations.
  • Higher Rates/Fees: Non-QM loans typically have slightly higher interest rates and fees compared to QM loans due to their flexibility and perceived risk.

Ready to Finance Your Colorado Short-Term Rental Property?

If you’re an investor eyeing the lucrative short-term rental market in Colorado, a Non-QM DSCR loan could be the perfect solution. Don’t let traditional lending limitations hold you back from growing your investment portfolio.

For more on non-QM loans, check out this article from Nerd Wallet.

This article from the CFPB explains the parameters for a qualified mortgage.

Contact Us Today to Explore Non-QM Loan Options for Your Colorado Investment Property!

Posted in Blog, Home Purchase