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The surprising effect of Airbnb income on mortgage refinancing

Renting out your house when you’re out of town or offering up an extra room while your son or daughter is away at college sounds like a great way to make some extra cash. And services like Airbnb have made the process rather simple.

But it might not be quite so simple when you go to refinance your home. Recently, some big banks are raising an eyebrow because making money off your home can be construed as turning your residence into commercial property.

According to a report in the Wall St. Journal, some banks — including Bank of America Corp. and Wells Fargo & Co. — have been telling borrowers who make income from Airbnb that they’re no longer able to get certain types of loans or that they must pay higher interest rates.

Essentially, a house is defined as either a principal residence or an investment property. The definition matters because it affects what type of loan you can get when you refinance.

That’s because banks typically view mortgages on investment properties as less secure because there are no guarantees about the amount of rental income. Borrowers are also more likely to default on mortgages for investment properties.

What’s more is that borrowers expect that noting their income from a rental like Airbnb will improve the interest rate they get upon refinancing. Yet sometimes they come to find the opposite is true.

A Bank of America representative told the Wall St. Journal that the distinction is based on whether there was a “material amount of commercial activity” related to the borrower’s primary residence verses “incremental renting.”

Lenders tend to require bigger down payments and apply higher interest rates to investment properties or second homes that borrowers don’t live in for a majority of the year. And, if a borrower defaults on a loan, mortgage investors and government agencies are known to ask the lender to repurchase the loan. As a result, lenders often become uneasy when the category a loan fits into seems unclear.

If these concerns end up affecting the vast number of Airbnb hosts, the impact will be great.

The issue came to a head for a borrower named Stephen Labovsky, who applied to Wells Fargo to refinance the mortgage on his San Francisco home.

Labovsky and his wife were Airbnb hosts who registered their property with the city, allowing them to rent it out for as many nights as year as they wanted while they are living there. They could rent the place out for no more than 90 nights per year when they weren’t there.

Wells Fargo looked at the case and suggested that their home was an investment property, which would have meant bumping up the interest rate by up to 0.5 percentage points. Labovsky decided not to refinance.

Amidst the uncertainty, the best recommendation when it comes to being an Airbnb host is to stay tuned. Be cautious and consult a lawyer if you’re thinking of becoming a host or if you’re already listing on Airbnb or a similar service. It’s going to take some more time for banks to sort out the ins and outs of how temporary rentals affect loans.

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