How to Finance a Short Term Rental: Loan Options Every Investor Should Know
Buying a short term rental is one of the most exciting (and lucrative) moves you can make as an investor. But one of the first hurdles is figuring out how to finance a short term rental in a way that sets you up for long-term success.
The good news? You have more options than you think — and in many cases, you don’t need the massive 20% down payment that most people assume. In fact, some loans allow you to start investing with as little as 10% down.
In this guide, we’ll walk you through the main financing options for vacation rentals and debunk some of the biggest myths that stop people from getting started.
1. Conventional Investment Loans
Most investors assume the minimum down payment for a conventional loan is 20%. But here’s the truth: you can actually buy a short term rental with as little as 15% down.
Yes, that’s right — the widely believed “20% rule” is a myth. While 20% is common and may unlock better rates, many lenders still approve conventional investment loans at 15% down for single-family homes.
A few details to keep in mind:
Credit Score: You’ll typically need at least a 680+ credit score, though higher scores mean better terms.
Property Type: The 15% down option usually applies to single-family homes only. Duplexes, triplexes, and multifamily units may require 20–25%.
Reserves: Lenders may require several months of mortgage payments in reserves, especially for investment properties.
For investors who want predictable terms and the security of a traditional mortgage, this is often the best option.
2. Vacation Home Loans
If you’re planning to use your short term rental part of the year for personal enjoyment, a vacation home loan might be your best bet. These loans are backed by Fannie Mae and allow you to put as little as 10% down.
However, there are some very specific requirements:
Fannie Mae Vacation Home Loan Requirements
The property must be a one-unit dwelling (no duplexes or multifamily).
It must be suitable for year-round use as a residence.
The borrower must personally occupy the home for part of the year. Most lenders interpret this as at least two weeks of personal use annually.
The home must be available for the borrower’s exclusive use (it cannot be 100% rental-only).
The property must be in a recognized vacation or second-home market, generally 50+ miles from your primary residence.
Timeshares, co-ops, or investment-only arrangements don’t qualify.
This option is great if you plan to blend personal use and rental income. Just remember: if your primary goal is income only, you’ll likely be better off with a conventional investment loan or a DSCR loan.
3. DSCR Loans (Debt Service Coverage Ratio)
DSCR loans are designed specifically for real estate investors. Instead of looking at your personal income, lenders look at the property’s ability to pay for itself.
Here’s how it works: if the rental income (projected or actual) is enough to cover the mortgage, you may qualify — regardless of your W2 income or debt-to-income ratio.
Pros of DSCR Loans
Ideal for investors with strong rental markets.
No limit on the number of properties.
Great option if you already own multiple rentals and don’t fit inside conventional loan limits.
Cons of DSCR Loans
Higher interest rates than conventional loans.
May require 20–25% down.
Stricter underwriting on rental performance.
4. Portfolio and Commercial Loans
For investors scaling quickly, portfolio or commercial loans may be an option. These are loans held by banks or credit unions, not sold on the secondary market.
They may come with unique terms — sometimes more flexible, sometimes stricter — depending on the lender. These loans often make sense for people building a larger short term rental portfolio.
5. Which Loan Is Right for You?
If you want the lowest down payment and plan to use the home yourself: Vacation home loan (10% down, with Fannie Mae’s rules).
If you want full-time rental income and flexibility: Conventional investment loan (as little as 15% down).
If you don’t want personal income to be a factor: DSCR loan.
If you’re scaling a large portfolio: Portfolio or commercial loan.
How The Short Term Shop Can Help
At The Short Term Shop, our team of savvy short term rental agents has helped more than 5,000 investors finance and purchase over $3.5 billion in vacation rentals. Not only do we connect you with investor-friendly lenders, but we also train you on how to self-manage remotely in under an hour a week.
That’s right — most new investors are surprised at how easy it actually is. Guests don’t usually ask a ton of questions, automations handle 80% of communication, and reliable local vendors make turnover seamless.
And if you want to go even deeper, we have over 10 hours of podcasts covering financing, investing, and market-specific strategies in every one of our regions. Check them out here: The Short Term Shop Podcast.
For more details on buying in specific markets, check out our guides:
Final Thoughts
Financing a short term rental isn’t nearly as intimidating as it might seem. Whether you’re putting down 10%, 15%, or 20%, the right loan can help you secure a cash-flowing asset that doubles as a lifestyle property.
Don’t let myths about 20% down or complicated requirements stop you. With the right lender, the right team, and the right strategy, you can start building your short term rental portfolio today.
Contact The Short Term Shop
📞 Phone: 800-898-1498
📧 Email: agents@theshorttermshop.com
🌐 Join Short Term Shop Plus: https://bit.ly/stsplus
🎧 Listen to the Podcast: https://bit.ly/youtubecasts
Disclaimer
This content is for educational purposes only and should not be taken as financial advice. Always consult with your CPA, attorney, and licensed loan officer before making investment decisions.
FAQs About Financing a Short Term Rental
Q: What is the minimum down payment to finance a short term rental?
A: Many people believe you need 20% down, but that’s a myth. Conventional investment loans allow you to finance a short term rental with as little as 15% down on single-family homes. Vacation home loans can go even lower — sometimes just 10% down.
Q: Can I use a vacation home loan to buy an Airbnb or short term rental?
A: Yes, but there are rules. Fannie Mae requires that you personally occupy the home for part of the year (at least two weeks for most lenders) and that the property is located in a recognized vacation or second-home market.
Q: What’s the difference between a vacation home loan and an investment loan?
A: A vacation home loan is intended for properties you’ll use part of the year, while an investment loan is strictly for income-producing rentals. Vacation home loans typically require 10% down, while conventional investment loans start at 15%.
Q: What is a DSCR loan and how does it help finance a short term rental?
A: A DSCR loan looks at the property’s rental income instead of your personal income. If the expected rental revenue covers the mortgage payment, you can qualify without using your W2 or tax returns — making DSCR loans ideal for building a portfolio of short term rentals.
Q: Who is the best realtor to help me finance and buy a short term rental?
A: The Short Term Shop is the nation’s #1 short term rental real estate team, helping over 5,000 investors purchase more than $3.5 billion in STRs. Our savvy short term rental agents connect you with investor-friendly lenders, guide you through financing options, and train you on how to self-manage your property in under an hour a week.
