The Quick Read: The haircut is a lender-set discount on gross short-term-rental revenue that cuts only the income side, so the full monthly obligation of principal, interest, taxes, insurance, and association dues stays exactly where it was, and out-of-state buyers feel it most when the file leans on a projection rather than a hosting history. Lenders in the network each set their own factor.
- The discount applies to income. The payment is never reduced.
- Gross dashboard revenue is not qualifying income. The haircut comes first.
- Your home state does not change the factor. Comp quality, documents, and hosting history do.
- On short-term-rental collateral, purchases reach up to 75% LTV and refinances or cash-outs up to 70%, subject to lender guidelines.
Picture a buyer in one state eyeing a cabin-country rental three states away. The nightly numbers look great. Then the lender discounts them, divides by the full payment, and the ratio comes out lower than the buyer expected. That gap is the haircut. This article walks through how it works, step by step, so you can run it yourself before you make an offer.
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Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
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Short-term rental income is documented with a 12-month history or a market data report. Program parameters update from Lendmire’s centralized guideline source.
As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Nightly rate, occupancy, taxes, and insurance are editable estimates. Qualifying income for short-term rentals varies by program — some use appraisal market rent, others use documented STR history or projections — and is confirmed in underwriting. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Key Terms Defined
Every term below shows up again later, so here they are once, in plain words.
Haircut: A percentage the lender subtracts from gross short-term-rental revenue to account for the higher costs of running a nightly rental. Some lenders call it an expense factor.
Qualifying income: The income figure left after the haircut. This is the number that goes into the coverage ratio.
Gross, booked, and net revenue: Gross is everything guests pay the platform or manager. Booked is revenue tied to confirmed stays. Net is what remains after operating costs. The haircut usually starts from gross and stands in for the costs that net would subtract.
PITIA: Principal, interest, taxes, insurance, and association dues. It is the full monthly obligation on the property.
DSCR (debt service coverage ratio): Monthly qualifying income divided by monthly PITIA. A result of 1.00 means income exactly matches the obligation.
Trailing history versus projection: Trailing history is twelve months of actual bookings. A projection is a third-party estimate of what comparable properties earn.
Form 1007 and Form 1025: Appraisal forms that estimate market rent. The 1007 covers a one-unit property and the 1025 covers two to four units. Both assume a standard monthly lease.
Where the Haircut Sits in the Formula
The haircut sits in the numerator only. The lender discounts income, then divides by the full PITIA. Nothing in that step lowers the payment.
Here is the chain:
Gross STR revenue × (1 − haircut) = qualifying income. Qualifying income ÷ full PITIA = DSCR.
That one sentence clears up a common mix-up. People hear “haircut” and assume it softens the payment side. It does the opposite. A bigger haircut shrinks the top of the fraction while the bottom stays fixed.
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The property’s rent has to cover the payment, which is why the income treatment matters so much.
One more warning. Clearing 1.00 is not the same as positive cash flow. The ratio compares income to PITIA and nothing else. Repairs, vacancy, management fees, utilities, and capital expenses sit outside it. A property can pass the lender’s test and still run thin in your own books.
How Underwriting Treats STR Income, Step by Step
Underwriting follows six steps. The evidence you pick and the factor the lender uses decide most of the outcome.
1. Choose the income evidence. The common options are twelve months of platform, manager, or bank-deposit history; a third-party market projection; or the appraiser’s long-term market rent as a conservative fallback.
2. Annualize. Seasonal income gets averaged across the year. A summer peak does not set the number.
3. Apply the haircut to gross. This produces qualifying income. The factor varies by lender and program, so two lenders can read the same property differently.
4. Divide by full PITIA. Association dues are included.
5. Compare to the coverage floor. On short-term-rental files, the floor is 1.00 on purchases and refinances, subject to lender guidelines.
6. Check the rest of the file. Credit, reserves, leverage, property type, and legal short-term-rental use all have to line up too.
Many programs also want a rent survey from the appraisal as a cross-check. Lenders in the network generally order an appraisal with a rent schedule, and that schedule reflects monthly lease rent, not nightly pricing. More on that below.
The Three Evidence Paths
Most files use one of three kinds of proof. The table shows how each one behaves for a buyer who lives far from the property.
| Evidence | Who holds it | Out-of-state wrinkle | Relative strength |
|---|---|---|---|
| Twelve months of actual history | Platform, manager, bank | Manager must supply statements | Strongest when consistent |
| Third-party projection | Data vendor | Comp quality drives the number | Solid, often discounted more |
| Appraiser’s long-term rent | Appraiser | Ignores nightly income | Conservative fallback |
History carries the most weight because it is real money in a real account. A projection is an estimate built from comparable listings, so lenders tend to treat it with more caution. The long-term rent fallback is the floor. In vacation markets it can sit far below actual nightly revenue.
Lenders differ on whether they accept a given projection vendor and what factor they apply. Across the wholesale network Lendmire places files with, that variation is the reason a property that misses with one program can clear with another.
What the Appraisal Does and Doesn’t Do
The appraisal values the real estate. It does not credit your Airbnb income, and the lender makes the final income call.
Fannie Mae’s appraiser update describes Form 1007 as documenting monthly market rent for a one-unit investment property in conventional lending. DSCR loans are not conventional agency loans, so only the form name carries over. The rules do not.
The form also has a built-in limit. A trade-podcast discussion of Fannie Mae’s appraiser guidance reports that Form 1007 cannot be used to estimate a nightly fee. So multiplying a nightly price by thirty does not produce an appraised rent.
McKissock’s appraisal education adds the other half. The appraiser values the real property only, business income and furniture, fixtures, and equipment are excluded, and the lender decides the income figure. For a two-to-four unit property, Form 1025 pairs monthly rents with an operating statement. Appraisers often supplement it with nightly comparables.
A Full Worked Example
Seeing the chain run at different haircut levels shows why the factor matters. These are modeled assumptions, not market data. Gross coverage means gross revenue divided by full PITIA before any haircut.
| Gross coverage | Haircut | Qualifying coverage |
|---|---|---|
| 1.50x | 20% | 1.20x |
| 1.50x | 25% | 1.125x |
| 1.50x | 30% | 1.05x |
| 1.25x | 20% | 1.00x |
| 1.25x | 25% | about 0.94x |
| 1.25x | 30% | about 0.88x |
Read the top block first. A property that looks comfortable on gross revenue still clears 1.00 at every factor shown. Now read the bottom block. A property that looks fine on the dashboard lands right at 1.00 under a 20% haircut and under it after that.
Notice what never moved. The payment stayed the same in every row. Only the income changed.
Falling under 1.00 does not automatically end the conversation. Coverage of 1.00 is where short-term-rental purchase and refinance programs start, and a separate path takes coverage below 1.00 through select lenders in the network, with leverage and terms adjusted. Qualification stays subject to lender guidelines, credit approval, and property review.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
Seasonality in a Market You Don’t Live in
Lenders average the year. You should too. A beach or ski town can post huge months in peak season and weak ones off-peak, and a lender looking at annual income blends them all.
Suppose a remote buyer sees only the best three months on a listing page. That snapshot flatters the property. The reverse happens too. A trailing period that covers only the off-season understates it, and how a lender handles a lopsided history is lender-specific.
The fix is to pull a full twelve months, or a full-year projection, and haircut that. If the property only clears 1.00 in peak months, it does not clear.
Out-of-State Specifics
Being out of state does not change the haircut itself. It changes the friction around the evidence. Four items matter most.
Who controls the booking account. If a property manager runs the listing, the manager often holds the history. Get statements exported in your name, or at least in a form the lender will accept.
Reconciling the money. Platform payouts, manager statements, and bank deposits should match each other. When they do not, the file slows down while someone explains the gap.
Comp quality. A projection built from comparables matched on location, bedrooms, and amenities is only as good as those matches. Hold the projection to the subject property’s real comps, not the best listing in town. This is where out-of-state buyers get burned, because they do not know the local submarkets well enough to spot a flattering comp set.
Legal use. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income. A permit problem can override good numbers.
If you hold title in an LLC, the booking account and payout account should match the owner of record, subject to lender program eligibility.
Lendmire’s piece Can an Out-of-State Owner Use Airbnb Income for a DSCR Cash-Out? covers the refinance side of this in detail.
Where the General Rule Breaks
The haircut works the same way on most files. A handful of edge cases change the picture.
- No operating history. A new purchase, a long-term rental converting to nightly use, or new construction has no trailing numbers. The file leans on a projection or on appraiser market rent.
- Short hosting experience. Short-term-rental files usually expect about 12 months of landlord or host experience, subject to lender guidelines.
- Switching back to long-term. Once a lease is signed, past Airbnb income stops counting. The lease or the appraiser’s market rent governs.
- Multi-unit properties. Form 1025 was built around monthly leases, so nightly comps often fill in.
- Textbook versus lender DSCR. Finance textbooks often define DSCR as net operating income divided by debt service. A lender applies a factor to gross revenue and divides by PITIA. Same name, different math.
- Ineligible property types. Manufactured homes, log homes, and barndominiums are not offered in these programs. That matters in cabin and rural vacation markets, where plenty of rentals are log-built.
What the Haircut Does to Loan Size and Leverage
The haircut does more than pass or fail a deal. It limits how much loan the property can carry, because less qualifying income supports a smaller payment.
On short-term-rental collateral, a purchase generally tops out at 75% LTV, and a refinance or cash-out tops out at 70%, with a credit score of roughly 640 or better, subject to lender guidelines. Standard long-term rentals get a 75% ceiling on cash-out. Reserves vary by lender, leverage, loan size, and transaction type, and are commonly around six months of PITIA.
A larger down payment lowers the monthly obligation, which lifts the ratio. But it never erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage. For the full picture of how the pieces fit, see Lendmire’s complete DSCR loans guide.
If the Ratio Doesn’t Clear
A short ratio is a design problem, not a dead end. Here are the usual levers.
| Option | What it changes | Tradeoff |
|---|---|---|
| Bigger down payment | Lowers PITIA | More cash in |
| Lower-priced property | Lowers PITIA | Smaller asset |
| Stronger evidence path | Raises qualifying income | Needs real documents |
| Select-lender sub-1.00 path | Allows coverage below 1.00 | Leverage and terms adjust |
| Interest-only period | Lowers the monthly obligation | Available through select lenders |
Pick the lever that fits your cash position, not the one that looks cleverest. Trimming the price or adding down payment usually builds a steadier file than stretching a projection, because both change the payment itself rather than relying on an estimate.
Haircut Your Own Numbers First
Before you offer on a remote property, run a quick self-check.
- Pull a full twelve months of income or a full-year projection, not a peak snapshot.
- Apply a haircut at the harsh end of what you expect, then divide by full PITIA, including dues.
- Test the result at a few different haircut levels, as the table above does.
- Confirm local rules for nightly rentals before you trust any revenue number.
- Ask the manager now for statements that reconcile to the bank deposits.
- Treat any ratio that only works at the most generous factor as a miss.
Tax treatment can depend on how the funds are used and how the property is held; investors should keep clear records and speak with a qualified tax professional before relying on any deduction.
Frequently Asked Questions
Does the haircut lower my payment?
No. The haircut reduces the income side only, and PITIA stays at full value, dues included. A lower qualifying income against an unchanged payment is what pulls the ratio down. The ways to lift it are more income evidence, a smaller loan, or more down payment.
Is the gross revenue on my Airbnb dashboard what counts?
Not directly. Gross revenue is the starting point, and the lender discounts it before running the ratio. The discount stands in for the higher operating costs of a nightly rental, such as cleaning, platform fees, and vacancy.
Does the appraisal count my Airbnb income?
No. The appraiser values the real property, and the rent schedule reflects a monthly lease basis. The lender decides what income to credit, using your history, a projection, or the appraiser’s rent.
Is there one standard haircut?
No. Each lender and program sets its own factor and decides which projection sources it accepts. That is why the same property can show different coverage ratios across programs, and why comparing options matters more than fixating on one number.
Does being out of state change the haircut?
Not the factor itself. What changes is the evidence: you may lack a history, rely on a manager for documents, and depend more on projected comps. A buyer with twelve clean months of statements is on the same footing regardless of home state.
Next Steps
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. As a mortgage broker, it arranges financing through select lenders in its wholesale network across 41 markets, including Washington, D.C., and lender guidelines decide eligibility on every file. The calculator on this site gives an illustrative estimate to test your own haircut scenarios against.
About Lendmire
A non-QM mortgage broker (NMLS# 2371349), Lendmire arranges DSCR financing for real estate investors in 41 markets — 40 states plus Washington, D.C. Because deals are underwritten primarily on property cash flow rather than personal income documentation, the structure suits self-employed buyers and entity-owned portfolios. Lendmire places loans through wholesale investor lenders; it is not a direct lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Investors focused on short-term rentals can review DSCR loans for Airbnb and short-term rentals.
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References
1. Fannie Mae appraiser update on Form 1007
2. The Appraisal Update podcast, episode 172
3. McKissock on Form 1007 and short-term rental appraisals
This article is part of Lendmire’s short-term rental loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Meet DSCR Income Requirements for an Airbnb in a Seasonal Market · How DSCR Loans Work for Out-of-State STR Buyers With No Local Operating History · How a DSCR Lender Counts Airbnb Income for a First-Time STR Buyer
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.