It’s one of the most common calls we hear from investors: “My Airbnb is killing it, but the bank won’t count the income.” Short-term rentals (STRs) have transformed cabins, condos, and lake houses into six-figure businesses. But for lenders, they’re also regulatory minefields and underwriting headaches. That’s why Debt Service Coverage Ratio (DSCR) loans have become the go-to financing path—if, and only if, you know how to present your file.
The Financing Gap
Traditional banks dislike STRs for three reasons:
- Volatility: Income swings wildly by month and by season.
- Legality: Some cities allow them, others ban them, many sit in gray zones.
- Insurance gaps: Standard landlord policies often exclude transient stays.
DSCR lenders fill the gap by focusing on property-level income, not personal W-2s. But they want one thing above all: bankability. If your STR looks like a hobby, underwriting will stall. If it looks like a business—with permits, insurance, and documented revenue—you’ll close faster and on better terms.
Case Study #1: Ava’s Lakeside Cabin
Ava bought a cabin in a popular summer market. Her Airbnb bookings were strong from June through August, but thin in winter. Her first lender declined, citing seasonal risk. A DSCR specialist approved her file only after Ava provided:
- STR license from her city
- STR-specific insurance with a $1M liability rider
- 18 months of Airbnb statements
- A seasonality table showing average occupancy and ADR
The difference wasn’t the property—it was the paperwork. Ava walked away with a 30-year DSCR loan at 75% LTV.
Case Study #2: Mark’s Unlicensed Condo
Mark assumed his downtown condo could be an STR because “everyone was doing it.” He bought with cash, ran Airbnbs for nine months, then applied for DSCR financing. Mid-underwrite, the lender discovered the HOA had quietly banned STRs. His income was real, but legally fragile. The lender declined. He was forced to pivot to long-term tenants, where DSCR worked but at a much lower cash flow.
Lesson: STR financing isn’t just about numbers. It’s about legality, insurance, and sustainability. Miss one, and you’re dead in the water.
What Lenders Expect in STR DSCR Files
- Permits & Licenses: City/county license or a written confirmation that none is required.
- Insurance: Policy with STR endorsement or specialized STR coverage.
- Documented Income: 12–24 months of Airbnb/VRBO statements or platform exports.
- Seasonality Snapshot: Occupancy + ADR by month, ideally paired with bank deposits.
- Plan B: Long-term rent comps to prove DSCR holds if STR income vanishes.
Seasonality: The Underwriter’s Lens
Lenders don’t assume your July numbers hold all year. They haircut income to reflect volatility. Here’s an example from a 3-bed cabin:
| Month | Occ. | ADR | Gross |
|---|---|---|---|
| Jan | 40% | $150 | $1,860 |
| Jun | 80% | $225 | $5,400 |
| Jul | 90% | $250 | $6,975 |
| Dec | 55% | $170 | $2,900 |
Underwriters average out annualized gross and apply a vacancy haircut (often 10–20%). A file that looks spectacular in July may look only average once adjusted. That’s why documenting multiple years helps.
Compliance Roadmap
Think of compliance as a three-legged stool: insurance, permits, and taxes. Miss one and the chair tips.
Insurance
- Landlord-only policies are insufficient.
- Request an STR endorsement with liability ≥$1M.
- Add business-income coverage if possible (protects against cancellations).
Permits & Licenses
- Provide city/county license certificate or screenshot.
- If pending, show receipt + written renewal process.
- HOA rules: include letter/email confirming allowance.
Taxes
- Show who collects lodging/occupancy tax (platform vs. owner).
- Provide registration + last filing proof.
- Add rate (%) and filing frequency to your summary sheet.
Risks to Model
- Regulation: Cities can ban STRs overnight. Always model long-term rents as fallback.
- Platform Risk: Don’t rely on Airbnb alone. Build direct-booking channels.
- Seasonality: Budget reserves to cover 3–4 down months a year.
FAQs (Expanded)
Do lenders accept AirDNA projections? Sometimes, but expect a haircut. Pair projections with real trailing 12–24 months if possible.
Can I close in an LLC? Yes, but licenses and insurance must match the entity on title.
What if HOA rules change? Lenders may re-underwrite your file as long-term. Always stress-test DSCR at market rents.
How much reserves do I need? Many DSCR lenders expect 6–12 months PITIA reserves for STR-heavy files.
Bankability Checklist
- STR license/permit uploaded.
- Insurance binder with STR endorsement.
- 12–24 months Airbnb/VRBO statements.
- Seasonality table with ADR + occupancy.
- Long-term rent comps as plan B.
Bottom Line
Short-term rentals can double the cash flow of long-term rentals, but lenders only believe the story if it’s documented. Walk into underwriting with permits, insurance, tax compliance, and a seasonality plan, and your STR will look like a business, not a gamble. That’s what unlocks DSCR financing in 2025 and beyond.
