The Quick Read: On a duplex, triplex, or fourplex refinance, the lender looks at each unit’s rent on its own, usually counts the lower of the signed lease or the appraiser’s market rent, adds the units together, and divides by the full monthly payment of principal, interest, taxes, insurance, and association dues. Most programs read an occupied unit this way and a vacant unit at market rent alone, though each program sets its own test.
- The appraisal does two jobs: it sets value for leverage and market rent for coverage.
- An above-market lease usually earns no extra credit; a below-market lease usually becomes the rent that counts.
- A strong unit typically does not make up for a weak one.
- Clearing 1.00 is not the same as positive cash flow.
- Subject to lender guidelines, credit approval, and property review.
Rent is the main qualifier on these loans, so the rent figure deserves more attention than almost any other line in the file. Lendmire is a mortgage broker that arranges DSCR investor loans across 41 markets, including Washington, D.C., through a wholesale network of lenders. Because it sees many programs side by side, the patterns below describe how files typically read, not how one lender reads them. For the full framework, see the complete DSCR loans guide.
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What Is the Basic Formula for a 2-4 Unit?
On a one-to-four unit property, the ratio is gross rent divided by PITIA. PITIA stands for principal, interest, taxes, insurance, and association dues. There are no deductions for repairs, vacancy, or management.
That is what separates it from commercial multifamily lending. The break to the commercial method generally comes at five or more units.
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.
Where Does the Rent Number Come From?
It comes mostly from the appraisal, not from the borrower. On a 2-4 unit, the appraisal is the small residential income report, Form 1025. Fannie Mae’s published appraisal forms list assigns Form 1025 to two- to four-unit properties and the Form 1007 rent schedule to one-unit investment properties.
The Form 1025 itself has the appraiser reconcile rental comparables into an opinion of market rent for each unit. So one report delivers value and per-unit rent together. These are appraisal forms only. DSCR loans are non-agency, and each program writes its own rent test.
| Form | What it is for | Role on a 2-4 unit |
|---|---|---|
| Form 1007 | Rent schedule, one-unit investment property | Not the usual form |
| Form 1025 | Small residential income appraisal | Value plus market rent per unit |
| Form 216 | Operating income statement exhibit | Often attached to the report |
Form 216 reports operating costs. A residential coverage calculation ignores most of those expenses, but the exhibit commonly travels with the report package, so expect to be asked for operating figures.
How Does the Lender Choose the Rent for Each Unit?
For an occupied unit, most programs in the network count the lower of the signed lease or the appraiser’s market rent. For a vacant unit, they count market rent. This is a program convention, not a regulation, and a few lenders accept the lease alone. Confirm the exact test before modeling a file.
| Unit status | Rent that typically counts |
|---|---|
| Leased at market | The lease rent, which matches market rent |
| Leased above market | Market rent; the excess earns nothing |
| Leased below market | The lease, since it is lower |
| Month-to-month or expired | Varies by program; often market, with documentation |
| Vacant | Market rent from the appraisal |
| Related-party tenant | Often the lower figure; program-specific |
Each unit is tested on its own, then the results are added. A unit rented well above market does not rescue one below market. Programs differ on details, so treat this as the common pattern.
What Does a Worked Fourplex Refinance Look Like?
Run the logic with labeled, modeled assumptions and no dollar figures. Picture a fourplex. Unit A is leased right at market. Unit B is leased above market. Unit C is leased well below market because the tenant has been there for years. Unit D is vacant.
- Unit A counts at its lease, which equals market.
- Unit B counts at market, not at its higher lease.
- Unit C counts at its below-market lease.
- Unit D counts at the appraiser’s market rent.
Add the four counted figures, divide by the full PITIA, and the result might land near 1.10x. Now change one fact: if Unit C had been renewed at documented market rent before the appraisal, the total rises and the ratio might move toward 1.20x. If Unit D were an unusable space rather than a legal, separately rentable unit, its rent would drop out and coverage could slip below 1.00.
That last point matters. The ratio can be fine on paper and still fail on a unit that is not legal or rentable on its own.
Why Does a Refinance Change the Math?
A refinance changes the payment, and the payment is the denominator. On a cash-out refinance, the new balance is larger, so the same rents produce a lower ratio than they did on the original loan. Cash-out tops out around 75% LTV across most of the network, with roughly 6 months of seasoning as the common expectation. Rate-and-term refinances can reach higher, with a ceiling of 85%, subject to lender guidelines.
Two limits control the loan: value and rent. Leverage caps set one ceiling, and the coverage floor sets the other. The lower one wins. The appraisal feeds both, so a low rent opinion can shrink proceeds even when value is strong.
Coverage thresholds vary. Many select programs start at 1.00, and stronger ratios open better pricing and leverage. A separate path below 1.00 is available through select lenders in the network, with leverage and terms adjusted. Credit matters as well: a 620 floor exists in parts of the network, most programs want about 660, and 700+ unlocks the strongest tiers. Reserves commonly run around 6 months of PITIA, stepping up to about 9 months above $1,500,000.
What Will the Lender Ask You to Prove?
The lender wants evidence that matches the unit status. Rent is supported by documents, but the appraiser sets the market figure.
- Occupied units: a signed lease for each, plus proof that rent is actually being paid.
- Whole building: a rent roll covering every unit that reconciles with the leases.
- Concessions: disclose free months or discounts. The 1025 instructions have appraisers adjust comparable rents for concessions to the market, so a comparable advertised high with a month free may enter the report at a lower effective rent.
- Vacant units: evidence the unit is legal and separately rentable.
A rent roll that does not match the leases is a common reason for re-review.
What Does Not Count?
Ancillary income such as pet fees, parking, storage, and utility reimbursements is generally excluded from the ratio. An owner’s pro forma does not count either. Rent above the appraiser’s figure does not count. Appraisers build the opinion from rental comparables, not from the subject’s own tenant arrangement.
Fixes and Timing Before the Appraisal
Most of the leverage sits before the appraisal is ordered.
1. Renew stale below-market leases at a documented market rent, not a discount signed to fill a unit.
2. Keep a clean rent roll with proof of payment.
3. Lease a vacant unit at a defensible rent before applying, if possible.
4. Confirm each unit is legal and separately rentable.
5. If the appraiser’s rents come in low, ask your broker about comps, a review, or a different program.
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.
When Does This Method Not Apply?
Three situations change the product. Owner-occupied buildings fall outside DSCR, which is built for non-owner-occupied investment property. Buildings of five or more units move to the commercial net-income method. Short-term rentals are different too.
On short-term rentals, McKissock Learning notes the 1007 cannot document nightly rental rates. Short-term rental files in the network follow a separate set of terms, including about 12 months of hosting history, and 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.
Common Mistakes
- Modeling on the lease alone and finding the appraisal comes in lower.
- Treating a passing ratio as cash flow. DSCR compares rent to PITIA only; repairs, vacancy, management, utilities, and capex sit outside it.
- Assuming a strong unit offsets a weak one.
- Ignoring the new, larger payment on a cash-out.
A larger down payment or lower balance can lift coverage, 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 a related angle, see Lendmire’s article Does a DSCR Lender Use Lower Rent on a 2-4 Unit Rental?.
Key Terms Defined
- Rent roll: a list of every unit with its tenant, rent, and lease status.
- Market rent: what the appraiser concludes a unit would rent for, based on comparable properties.
- In-place rent: the rent the tenant actually pays under the current lease.
- PITIA: principal, interest, taxes, insurance, and association dues, the monthly obligation in the ratio.
- DSCR (coverage ratio): counted rent divided by PITIA.
- Form 1025: the appraisal report for two- to four-unit income properties.
Frequently Asked Questions
Does an above-market lease raise my coverage ratio?
Usually not. Most programs cap the unit at the appraiser’s market rent, so the excess earns no credit. The lease only drives the number when it is at or below market.
Can a vacant unit still count?
Typically yes, at the appraiser’s market rent, provided the unit is legal and separately rentable. Some programs ask for more documentation or lower leverage when a unit is empty.
How is a family member’s lease treated?
Often at the lower of the lease or market, with extra documentation. Treatment is program-specific, so confirm before relying on it.
Does each unit need its own lease?
Occupied units are usually supported by a lease each, tied to a rent roll. Month-to-month arrangements are handled differently by different programs.
Is this the same as commercial multifamily underwriting?
No. Two-to-four units use gross rent over PITIA. The net-income method applies at five or more units.
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. Reach the team at 828-256-2183.
Tax treatment varies; consult a qualified professional.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage focused on investor financing, arranging DSCR loans in 40 states plus Washington, D.C. — 41 markets total. Qualification is based on the property’s income rather than personal income documentation, subject to lender guidelines, making it a fit for LLC-held rentals and scaling portfolios. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B4-1.2-01: Appraisal Report Forms and Exhibits
3. McKissock Learning, Form 1007 and Short-Term Rental Appraisals
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Section 8 Rent vs Market Rent for a DSCR Loan Investor · Can You Do a DSCR Cash-Out Refinance on a Multifamily Building? · Can You Use Delayed Financing for a DSCR Refinance?
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.