Shopping for a Smokies cabin and stuck on financing? You are not alone. In Gatlinburg and across Sevier County, the right loan can make or break your plan, especially if you want rental income. In this guide, you will learn how DSCR loans, second-home loans, and conventional investment loans work, what lenders look for here, and which path may fit your goals. Let’s dive in.
Why your loan choice matters here
The Great Smoky Mountains draw consistent visitor demand, which supports strong short-term rental potential for cabins. That demand is also seasonal, with busy summer and fall periods and slower shoulder months. Lenders understand this pattern, so they pay close attention to income documentation, vacancy assumptions, and cash reserves.
Cities and counties in Tennessee commonly require business licensing, hotel or motel tax registration, and sometimes local short-term rental permits. Local zoning or HOA rules may restrict rentals. Lenders typically want evidence that rentals are legal for a given property. Before you commit to a loan strategy, check current Gatlinburg and Sevier County requirements and any HOA rules for the property you are considering.
DSCR loans for rental cabins
Debt-Service Coverage Ratio loans qualify primarily on the property’s cash flow. Lenders compare net operating income to the annual mortgage payments to produce a DSCR number. Many lenders target a minimum DSCR around 1.0 to 1.25, but the exact threshold varies.
- What lenders focus on: Property income and expenses, vacancy assumptions, and an appraisal that supports projected rents. Credit and cash reserves still matter, but personal DTI may be secondary.
- Common features: Flexible documentation and sometimes faster closings. These are often non-QM or portfolio products. Rates and fees are usually higher than conforming loans.
- Typical down payment: Often 15 to 30 percent. For cabins positioned as short-term rentals, 20 to 25 percent is common, and some lenders ask for more in tourist areas.
- Reserves and appraisal: Reserves often run near 6 months or more of payments. Appraisals may include an income approach and third-party rent support.
Best for you if your plan is to operate the cabin primarily as a rental, you can document strong cash flow, and you accept higher rates in exchange for more flexible underwriting.
Second-home loans in Sevier County
Conventional second-home loans are underwritten as a secondary residence for you, not an investment. You must intend to occupy the property part of the year. Lenders usually disallow operating it as a business-like short-term rental.
- What lenders focus on: Your income, DTI, credit, reserves, and your documented intent to use the property as a second home.
- Common features: Lower interest rates and fees than investor or DSCR loans. Standard conforming documentation applies.
- Typical down payment: Often around 10 percent, though some scenarios require more based on credit and lender rules.
- Rental use: Incidental renting may be permitted by some programs, but if renting becomes primary, the second-home classification often no longer applies.
Best for you if you want a personal retreat with occasional use, you qualify on your income and DTI, and you do not plan to run a short-term rental business.
Conventional investment loans
These loans treat the property as an investment. Lenders use your borrower profile, then add rental income if you can document it with leases or tax returns.
- What lenders focus on: Your DTI, plus rental income with standard haircuts or leases. STR income may be accepted by some lenders with robust documentation, but requirements vary and can be strict.
- Typical down payment: Commonly 15 to 25 percent for a single-unit investment property under conforming guidelines. Rates are usually higher than second-home loans, but often lower than many DSCR products.
- Reserves and appraisal: Expect higher reserve requirements than a second home. Appraisals may include rent schedules and an income approach.
Best for you if you plan a long-term rental strategy with leases, or you prefer conforming underwriting and can document rental income.
How lenders count rental income
Documentation paths
- Tax returns: Many conventional lenders want two years of Schedule E to treat rental income as stable.
- Leases or management statements: Long-term leases help. For STRs, 12 to 24 months of performance data from management statements or platform payouts may be used by some lenders.
- Market rent approach: If there is no history, lenders may use market rent comps or an appraiser’s income approach with vacancy and expense adjustments.
- DSCR evidence: DSCR lenders often accept management statements, bank statements, or projections instead of W-2s.
Adjustments and haircuts
- 75 percent rule: A common conventional practice is to count about 75 percent of gross rent to cover vacancy and expenses.
- Expense capture: Taxes, insurance, HOA dues, utilities, and management fees reduce the income used for qualification.
- STR acceptance: Many conforming lenders remain conservative about STR income. Some accept it with strong documentation and may require higher reserves or larger down payments. Policies differ by lender.
Appraisal expectations
- Appraisal types: Owner-occupied and second homes often use a standard sales comparison. Investment and STR properties may require an income approach or a rent schedule.
- Resort properties: Condos or cabins in resort communities may face condo project reviews. High STR concentrations can lead to non-warrantable status with some conventional lenders.
Costs and terms at a glance
- Rate pattern: Primary residence tends to be lowest, followed by second home. Investment and DSCR loans usually carry higher rates and sometimes points.
- Down payment: Second-home options often start near 10 percent. Investment loans often need 15 to 25 percent. DSCR loans often land between 15 and 30 percent, with 20 to 25 percent common for STRs.
- Reserves: Second homes may require 2 to 6 months. Investment and DSCR loans often require 6 months or more, with some lenders stacking reserves for multiple properties.
Which option fits your plan
- You are an STR-first investor: DSCR can fit if the property’s cash flow and documentation are strong and you accept higher rates and larger reserves. A conventional investment loan may work if you can document STR or lease income to the lender’s standard.
- You are a lifestyle buyer: A second-home loan fits when you plan regular personal use and incidental renting, if allowed by the lender. If rentals become your primary use, expect an investment or DSCR program instead.
- You are leasing long term: A conventional investment loan is often the best match when you can provide leases or tax returns.
- You are hybrid use: If owner use is significant and rentals are incidental, a second-home loan may be possible. If renting is primary, focus on DSCR or investment options.
Local compliance checklist
- Confirm local legality: Verify city or county STR permits, business license, and hotel or motel tax registration as required.
- Review HOA rules: Some associations restrict or ban short-term rentals or have project rules that affect financing.
- Prepare documents: Lenders often want proof of legal rental use plus income history or market projections.
Lender-question checklist
Ask these questions and get answers in writing.
- Program classification
- Will the property be treated as a second home or an investment property?
- Short-term rental policy
- Do you accept STR income? What proof is required and for how many months? Do you require proof of permits or tax registration?
- Income documentation
- How do you calculate qualifying rental income? Do you use tax returns, leases, or a percentage of gross rent? For DSCR, what DSCR threshold and expense assumptions do you use?
- Down payment and LTV
- What minimum down payment and maximum LTV do you allow for a Sevier County STR cabin?
- Interest rate and fees
- What rate range applies to my credit score and LTV? Itemize points, origination, and any STR pricing adjustments.
- Reserves and seasoning
- How many months of reserves do you require? Do you require seasoned funds for the down payment?
- Appraisal and valuation
- What appraisal type is required? Will you accept an income approach or STR comps and third-party rent data?
- Condo or HOA eligibility
- Do you have condo warrantability rules or limits on rental concentrations in a project?
- Tax return treatment
- If Schedule E shows a loss due to depreciation, how do you treat it? Do you allow add-backs?
- Personal use rules
- If I plan owner use a set number of days and rent the rest, which programs allow that plan?
- Timeline
- What is your average time to underwrite and close this program?
- Recourse
- Is this loan recourse or non-recourse?
- Insurance and escrow
- What insurance coverages do you require for cabins here, and is escrow required for taxes and insurance?
- Prepayment penalties
- Are there prepayment penalties or restrictions that affect sale or refinance timing?
- Mortgage insurance
- If LTV exceeds 80 percent, is PMI required and how is it handled for second homes or DSCR loans?
Risks to plan for
- Regulatory risk: Local rules can change. A property that is legal to rent today may face limits later.
- Seasonal cash flow: Off-season months can pull your DSCR lower. Hold strong reserves.
- Insurance costs: Wooded locations, flood zones, or wildfire risk can raise premiums.
- Project rules: Heavy STR concentration may affect condo warrantability or resale.
- Exit strategy: Higher DSCR rates can change refinance math. Plan your timeline to refinance or hold.
Smart next steps
- Clarify your use plan: Personal use, STR, or long-term lease.
- Verify property eligibility: Confirm permits, business license needs, hotel or motel tax registration, and HOA rules.
- Gather documents: Income statements, management reports, bank statements, and any leases.
- Model seasonality: Stress test your numbers with realistic vacancy and expenses.
- Price insurance early: Get quotes for hazard, flood if required, and any special coverages.
- Talk strategy with a local guide: If you want help matching properties and financing paths, connect with Michele Harrill to schedule a consultation.
FAQs
Can I use STR income for a conforming loan in Gatlinburg?
- Many conforming lenders want two years of Schedule E or leases, though some may accept STR income with strong documentation and added reserves.
Can I get a second-home loan and still rent sometimes?
- Many second-home programs allow incidental renting, but they usually prohibit operating the property as a business-like STR.
Are DSCR loans more expensive than second-home loans?
- Typically yes. DSCR and other non-QM loans often have higher rates and fees because they rely on property cash flow and portfolio guidelines.
How do lenders treat rental losses on tax returns?
- Some lenders add back non-cash expenses like depreciation, while others follow the tax return figures. DSCR lenders focus more on current cash flow than tax accounting losses.
Will lenders require proof that STRs are legal in Sevier County?
- Yes. Lenders commonly ask for evidence such as permits, business licensing, and hotel or motel tax registration since legality affects income and value.
