The Quick Read: Private loan money can play two roles in a first DSCR rental deal: it can fund the purchase of the property, or it can supply your down payment. The first role is routine. The second role gets far more scrutiny, and programs differ on it, so ask before you sign a purchase contract.
- Private money that buys the property is paid off at the DSCR refinance. It does not sit next to the new loan.
- Private money used as your down payment is reviewed harder, and most programs want the down payment to be your own verified funds.
- A signed note, a transfer trail and a paper statement history are the three things that make or break the file.
- The private loan’s repayment sits outside the coverage ratio, but you still have to carry it.
- Decide the structure before contract, not during underwriting.
Two Different Jobs for “Private Money”
Private money can play two roles on a rental purchase, and underwriters treat them very differently. Mixing them up is the most common way a first-time borrower gets surprised.
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Role one: the acquisition loan. A private individual or fund lends against the property itself. They take first position, which means they are first in line to be repaid, backed by a note and a recorded security instrument. You buy, season the property, put a lease in place, and refinance into long-term DSCR financing. The private lender is paid off at closing.
Role two: the down payment. Here the private money goes into your account, and you use it as your cash into the DSCR purchase. This is the harder case. Across our wholesale network, most programs want that cash to be yours, sourced from your own accounts.
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. That means personal income documents are not the center of the file. Your assets still are.
Key Terms Defined
DSCR (debt service coverage ratio): the property’s monthly rent divided by its monthly debt obligation, used to judge whether the rent covers the loan.
PITIA: principal, interest, taxes, insurance and any association dues, which together make up the monthly obligation in the ratio.
Promissory note: the written contract that says who owes whom, how much, and on what repayment terms.
Security instrument: a mortgage or deed of trust, depending on the state, that ties the note to the property as collateral.
Sourced and seasoned funds: money a lender can trace to a legitimate origin and that has sat in your account long enough to show it is yours.
Letter of explanation: a short signed statement that explains a large deposit or an unusual transaction on your statements.
Combined loan-to-value (CLTV): all loans secured by the property added together and divided by its value.
Will the DSCR Lender Accept It?
It depends on the role the money plays and on whether it is secured or unsecured. A private loan against the property that is paid off at refinance is routine. Borrowed money used as your down payment is restricted on most programs we place files with, and a few select lenders in the network will review secured structures case by case.
| Scenario | How it is typically treated |
|---|---|
| Private acquisition loan paid off at DSCR refinance | Typically reviewed; lien released at closing |
| Unsecured personal loan for the down payment | Often flagged; usually restricted |
| Seller-carried second behind the DSCR loan | Changes combined leverage; ask first |
| Secured borrowing against another asset | May be reviewed on select programs; ask first |
| Partner contributing equity, no repayment | Different structure; the partner is a co-owner |
| Gift with a signed gift letter | Reviewed; a loan cannot be relabeled a gift |
Programs change, and every file is underwritten individually. Treat this table as a map of where to ask questions, not a promise about any single lender.
The Documentation Packet
The packet is what an underwriter wants to see before asking questions. Build it before the money moves.
| Document | Who produces it | What the underwriter checks |
|---|---|---|
| Executed promissory note | You and the private lender | Amount, repayment terms, signatures |
| Recorded mortgage or deed of trust | Attorney or title company | First lien position and the payoff plan |
| Wire or transfer confirmation | Private lender’s bank | Money left their account and reached yours |
| Your bank statements, full pages | You | Deposit shows up; no unexplained withdrawals |
| Letter of explanation | You | Deposit and any repayments are explained |
| Payoff statement | Private lender | Exact balance owed at the DSCR closing |
| Lien release | Private lender via title | The old lien is removed at closing |
Many files stall on small gaps. A missing signature page or a statement with half its pages cut off is enough to pend the file.
How to Write the Note
The note is the core document. A loan from a relative needs one too, because a handshake leaves the underwriter with nothing to read.
A solid note usually names these items:
- The borrower, the lender and the loan amount.
- The repayment schedule and the maturity date.
- Interest and any fees, as agreed between the parties.
- What counts as default, and what happens then.
- An extension clause, if the loan might run past its first term.
- Signatures from every party, dated.
If the loan is secured, the note works with a security instrument. The note and any personal guaranty are private documents and are not recorded. The security instrument is what gets recorded in the county records.
Use a lending attorney for the state-specific documents. Terms for short-term private acquisition loans are typically interest-only and run for months, not years. Varies by lender, property and your experience.
What not to do:
- Do not sign a note after the money has already moved.
- Do not leave repayment terms vague.
- Do not call a loan a gift to avoid the paperwork.
- Do not let the private lender hold an unrecorded verbal lien promise.
Proving the Money Moved
Underwriters trace money. They want to see it leave the private lender’s account, arrive in yours or in escrow, and match the note.
For an acquisition loan, funds often go straight to title and escrow, so the trail is the settlement paperwork. For a down payment, the trail runs through your bank statements. Send full statement pages, every page, in your name and from an account you own.
A large deposit that does not match your normal pattern will draw a question. So will recurring withdrawals that match no credit account you disclosed, because they can signal debt you left off the application. Answer both before the underwriter asks.
A short letter of explanation usually covers four points:
1. What the deposit is and who sent it.
2. Whether it is a loan, a gift, or your own money moved between accounts.
3. The date it arrived and the account it landed in.
4. A reference to the attached note or gift letter, signed by you.
Keep it plain. The goal is that the file tells one consistent story.
The Timeline: Before, During, At Closing
Sequence matters more than speed. Do these in order.
| Stage | What to do |
|---|---|
| Before contract | Confirm the exit: refinance, partner buyout, or repayment |
| Before the money moves | Ask the DSCR lender how the private money will be treated |
| Before the money moves | Sign the note; record the security instrument if secured |
| During the loan | Keep payment records and full bank statements |
| During the loan | Place the lease and season the property |
| At refinance | Collect the payoff statement from the private lender |
| At closing | Title pays off the note and releases the lien |
Private money can only help with some of the costs in a purchase, because down payment, closing costs, and reserves are treated differently.
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.
Two Worked File Examples
A clean file. An investor buys a duplex with a private acquisition loan. The private lender holds a recorded first lien and a signed note. The investor places a tenant, and the rent covers the full monthly obligation on the new loan at roughly 1.2x. The DSCR lender sees the note, the recorded lien and a payoff statement. Title pays the private lender at closing and releases the lien. Nothing is left to explain.
A flagged file. Another investor borrows from a relative to cover the down payment. There is no note, and the money lands in the investor’s account as a round-number deposit. The statements also show monthly withdrawals to the relative that match no disclosed debt. The underwriter asks whether this is a gift or a loan. If it is a loan, it is unsecured borrowed money used as the down payment, which most programs restrict. The investor then has to restructure the deal or bring in other funds.
The property’s rent was identical in both cases. The paper trail decided the outcome.
How the Note Hits Your Cash Flow and Leverage
A private note does not change the property’s coverage ratio. The ratio compares rent to the new loan’s PITIA, and the note on the old loan is gone at closing. Borrowing for your down payment is a different story. It adds repayment on your side, and that is real money out of your pocket even though the ratio ignores it.
Remember what the ratio measures. Clearing 1.00 is not the same as positive cash flow, because repairs, vacancy, management, utilities and capital expenses sit outside the calculation. Coverage of 1.00 is where select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger ratios open better pricing and leverage.
On leverage, most purchase files land at 75% to 80% LTV, which means 20% to 25% down. Select high-leverage programs reach 85% LTV on a purchase with roughly a 700 or higher score. On a cash-out refinance of an investment property, leverage tops out around 75% LTV across most of the network, and about six months of seasoning is the common expectation. If the private loan is paid off with a refinance, the lender decides how to classify the payoff, so confirm that before you count on a specific leverage tier. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
A bigger down payment helps the payment and can lift the ratio. It does not erase credit floors, reserve rules or property eligibility. Reserves vary by lender, leverage, loan size and transaction type, and they commonly run around six months of PITIA. The strongest files have enough equity and enough rental coverage.
Adjacent Routes and How Their Paper Differs
Gift funds. A gift needs a signed letter confirming that no repayment is expected. A loan does not qualify as a gift, so do not relabel one.
Partner equity. A partner who contributes cash and shares ownership is not a lender. You document it through the ownership agreement and the entity papers. If the property is titled in an LLC, eligibility is subject to lender program requirements.
Cash-out on another property. Pulling equity from a rental you already own produces a documented, seasoned source of funds. It comes with its own leverage cap and seasoning, noted above.
Bridge, then refinance. This is the cleanest private-money path for a first rental. Many investors refinance out of short-term private or hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. Lendmire’s piece How to Refinance a Rental Pool With Private Money Into a DSCR Loan goes deeper on the payoff mechanics.
A contrast helps here. Agency-backed conventional guidelines treat borrowed funds that are secured by an asset as an acceptable down payment source, as Fannie Mae’s Selling Guide explains. DSCR loans are non-agency products, so each lender sets its own rules. Do not assume the conventional answer carries over.
For the basics behind all of this, see the complete DSCR loans guide.
Mistakes to Avoid
- Treating borrowed money as your own. Underwriters distinguish the two.
- Assuming DSCR means no document review. DSCR qualifies primarily on property-level rental income covering the payment, subject to lender guidelines, but your assets and funds are still reviewed.
- Hiding the loan. A personal loan shows up on bank statements and credit.
- Skipping the note for family money.
- Letting a lien survive the refinance without a payoff plan.
- Expecting zero-down financing. It does not exist on these programs.
- Waiting until underwriting to ask how the lender sees the private money.
Questions to Ask Before the Money Moves
1. Is the private money treated as an acquisition loan, down payment funds or a liability?
2. Does this program accept secured borrowed funds, or only my own funds?
3. Will the private lien change combined leverage?
4. What documents do you need on the note and the transfer?
5. How is the payoff classified at my refinance, and what seasoning applies?
6. What reserves does this loan size and leverage require?
Program terms come from each lender’s guidelines, and nothing here is a commitment to lend.
Frequently Asked Questions
Can I use a loan from a friend or family member as my down payment?
Usually not as an unsecured loan. Most programs we place files with want the down payment to be your own verified funds, and an unsecured personal loan tends to get flagged. A few select lenders may review a secured structure. Ask before the money moves.
Does the private lender need a recorded lien?
If the loan is secured by the property, yes. An individual lender typically wants a recorded first lien, which is why it must be paid off and released when the DSCR loan closes. The note itself is a private document that is not recorded.
Does private loan money change my DSCR?
No. The ratio compares rent to the new loan’s PITIA. A private loan on the old purchase disappears at payoff. Private money used for your down payment does not change the ratio, but it does change your real cash flow.
What if I get a large deposit before closing?
Document it right away. Keep full statement pages, attach the note or gift letter, and write a short letter of explanation. Unexplained deposits are among the most common reasons a file gets questioned.
Can a partner’s money count instead of a loan?
A partner who contributes equity and takes part ownership is a different structure from a lender. You document it through the ownership agreement, and the lender reviews it under the program’s entity rules.
Next Step
If you are buying, rehabbing or refinancing an investment property and want to see how the numbers work, Lendmire can help you compare options based on the project, the exit plan, leverage and your goals. Call 828-256-2183 to talk through how private money fits your file before you sign a contract.
About Lendmire
Lendmire (NMLS# 2371349), a non-QM mortgage broker serving investors in 41 markets including Washington, D.C., helps structure DSCR scenarios commonly evaluated around a property’s rental income rather than personal income paperwork, subject to lender guidelines. A Scotsman Guide Top Mortgage Workplace in 2025 and 2026, Lendmire places loans through wholesale investor lenders and is not a direct lender.
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References
1. Fannie Mae Selling Guide B3-4.3-15: Borrowed Funds Secured by an Asset
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Finance Your First Short-Term Rental on DSCR in Retirement · Interest-Only vs Down Payment for a Furnished Rental DSCR Loan · How to Document Airbnb Income From a Garage Conversion on a DSCR Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.