Can You Use DSCR Loans for Short-Term Rentals? What Investors Need to Know

Why Short-Term Rentals Are Booming

Short-term rentals have rapidly become one of the most sought-after real estate investment strategies. Platforms like Airbnb, VRBO, and Booking.com have empowered property owners to rent homes by the night, creating an entirely new revenue stream that often outpaces the earnings from traditional long-term tenants. Instead of earning $1,800 a month from a long-term lease, investors in desirable markets can earn the same—or more—in a single week.

This new model attracts both experienced investors and new entrants who want to build a scalable portfolio without relying on conventional lease structures. Markets like Miami, Nashville, and Scottsdale have seen major surges in short-term rental listings, and many suburban and secondary cities are catching up. The flexibility of STR pricing, ability to increase nightly rates during high-demand seasons, and the appeal of vacation-style living have turned once-overlooked properties into high-performing investments.

Why DSCR Loans Are a Fit for STRs

However, many investors run into a problem: traditional mortgage products aren’t built to handle the unique income patterns of short-term rentals. These properties often lack long-term leases or stable monthly income—both of which are required for agency-backed loans. That’s where DSCR loans come in.

A DSCR loan evaluates a property’s ability to cover its own debt obligations through its rental income. The ratio itself—Debt Service Coverage Ratio—is calculated by dividing the property’s monthly income by its monthly principal, interest, taxes, and insurance (PITI) payments. A DSCR of 1.00 means the income exactly covers the expenses, while a DSCR above 1.00 signals positive cash flow.

Unlike conventional loans, DSCR programs do not require verification of the borrower’s personal income. That means investors do not have to submit W-2s, tax returns, or pay stubs. Instead, qualification hinges entirely on the property’s performance. This makes DSCR loans highly attractive for short-term rental investors, especially those who are self-employed, write off large portions of income, or are building portfolios rapidly.

How Lenders Evaluate STR Income

Short-term rentals are eligible for DSCR loans, but they must meet additional underwriting standards. Lenders must validate that income from nightly bookings is consistent, sustainable, and supported by local zoning and regulatory conditions.

The first step in DSCR loan approval is demonstrating sufficient property income. For short-term rentals, this process is more nuanced than it is for long-term leases.

The most commonly accepted method involves using a rent schedule known as FNMA Form 1007 or 1025. This form is completed by a licensed appraiser who compares the subject property to similar short-term rentals in the area. These must be actual short-term rental comps—properties with active nightly listings, not long-term tenant-occupied homes.

Appraisers must consider nightly rates, occupancy trends, and local seasonality. If these factors are not addressed clearly in the appraisal, the lender may apply a vacancy adjustment—often 40%—to offset income volatility.

If the property has an operating history, the borrower may provide 12 months of rental income statements from platforms like Airbnb or VRBO. These must show consistent booking activity and actual deposits. Lenders review month-by-month performance to ensure there are no prolonged gaps in occupancy. While some seasonal fluctuation is acceptable, large swings in income may trigger additional scrutiny or require reserve buffers.

In cases where the property lacks a long rental history, projected income tools like AirDNA, PriceLabs, or Mashvisor may be used. These tools forecast potential revenue based on occupancy rates, seasonal pricing, and local demand. However, these projections must be validated by the appraiser, and lenders often apply a margin of safety by discounting forecasted income. Properties relying solely on projections may also be subject to lower loan-to-value (LTV) ratios or require higher DSCR thresholds.

Required Documentation for STR DSCR Loans

Borrowers need to present clear, verifiable documentation that supports the income and regulatory status of the short-term rental. This includes a rent schedule with accurate STR comps prepared by the appraiser. If using income history, borrowers must provide Airbnb or VRBO payout summaries showing at least 12 months of rental activity. These should be supported by bank statements confirming receipt of funds.

Proof that the short-term rental is legal and compliant with local ordinances is essential. This may include a business license, short-term rental permit, or third-party verification from services like Property Guard or Vrolio. Some lenders require written confirmation from the city or county government stating that short-term rentals are allowed at the subject property.

Additional documentation may include photos of the property in rental-ready condition, utility bills showing active service, and in some cases, property management contracts.

Ineligible Properties and Restrictions

Certain properties are automatically ineligible for DSCR financing when used as STRs. Any property located within the five boroughs of New York City—Manhattan, Brooklyn, Queens, the Bronx, and Staten Island—is excluded due to local laws that restrict or ban short-term rentals. Properties occupied by the borrower or their immediate family also do not qualify, as DSCR loans are for investment properties only.

No-Ratio DSCR loans, which waive income requirements entirely, are not allowed for short-term rentals. These products are reserved for long-term rentals with different risk profiles. Properties with restrictive HOA rules that prohibit short-term leasing, or in jurisdictions with pending legislation against STRs, may also be disqualified.

Loan Terms and Highlights

Launch Financial Group offers DSCR loans with terms specifically designed for STR investors. The minimum required DSCR is typically 1.00, although some programs may accept a lower ratio such as 0.75 for experienced investors with strong credit and assets.

Foreign nationals or first-time investors may be required to show a DSCR of 1.25 or higher.

Loan-to-value ratios usually range from 75 to 80 percent for STR properties. When income projections are used instead of verified rental history, lenders tend to favor the lower end of that range. Properties must be single-family homes, two- to four-unit dwellings, or condos and townhomes that are legally zoned and compliant with HOA guidelines.

Some DSCR programs may require three to six months of PITI reserves, especially in cases where rental income is seasonal or projections are aggressive. This reserve requirement ensures the borrower can service the debt even during low occupancy periods.

DSCR Loans vs Conventional Loans

Many investors new to the short-term rental space explore both DSCR and conventional loans before making a decision. Conventional loans are governed by agency underwriting standards and require full personal income verification, including tax returns, pay stubs, W-2s, and a detailed review of the borrower’s debts. Debt-to-income ratios are capped, and investors are often limited to 10 financed properties.

DSCR loans remove these constraints. They do not require personal income documentation, and they allow for unlimited financed properties. This is a huge advantage for investors scaling quickly or purchasing multiple STRs in a single year.

Another key difference is the speed of approval. DSCR loans can typically close in as little as 10 to 21 days, depending on documentation readiness and appraisal timing. Conventional loans tend to take longer and come with more red tape, particularly for investors with complex financials.

State and Local Compliance Matters

One of the most important aspects of financing short-term rentals is understanding local and state regulations. STR laws are not consistent across states—or even within cities. What’s allowed in Orlando may be banned in Miami Beach. What’s permissible in Phoenix could be restricted in Scottsdale.

In California, many cities require STR permits and enforce strict guest limits, noise ordinances, and taxation. In Hawaii, STRs are often restricted to resort-zoned areas, and licensing is mandatory. In Texas, regulations can vary by neighborhood and HOA. Investors must conduct due diligence to confirm that their property complies with all relevant rules.

Some states are particularly favorable for STR investors. Florida, Tennessee, and Arizona are considered investor-friendly, with large tourism economies and more lenient rules. Others, like New York or some cities in California, have taken a more aggressive regulatory approach.

Launch Financial Group encourages all borrowers to confirm local zoning compliance before moving forward with a loan application. Ineligible or non-compliant properties can lead to denied financing or legal exposure down the line.

Final Considerations for STR Investors

Short-term rentals represent a highly profitable opportunity in the real estate world, but they come with added layers of complexity. Investors should be prepared to document income thoroughly, validate legal compliance, and partner with an experienced DSCR lender that understands the nuances of underwriting STR properties.

Working with an appraiser who is familiar with STR valuation can make a significant difference in how the income is assessed. Additionally, keeping organized records of platform income, occupancy trends, and local licenses will reduce friction in the approval process.

With the right planning and support, DSCR loans can serve as a powerful tool for expanding a short-term rental portfolio, especially in high-demand markets where cash flow performance makes traditional loans less viable.

For more information or to explore your options, visit https://www.launchfg.com or speak with a DSCR loan expert who specializes in short-term rental strategies.