The Quick Read: You do not convert a balloon loan. You take out a new DSCR loan, sized on the building’s rent and appraised value, and its proceeds pay off the old note at closing.
- The old balloon is retired at closing. It never enters the new coverage math.
- Only the new loan’s payment is tested against the building’s rent.
- A 30-year fixed structure is what ends the balloon cycle. Moving into another short-term loan only resets the clock.
- Coverage and equity both have to work. Leverage caps, credit floors and reserves still apply, subject to lender guidelines.
- Start well before maturity. A refinance that stalls at the deadline leaves you few good options.
Why a Balloon Is a Deadline, Not a Debt Problem
A balloon loan is built to be refinanced. Your payments are sized as if the loan ran for decades, but the note comes due much sooner. The unpaid balance is due in one lump sum on the maturity date.
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LoopNet notes that balloon terms on commercial loans often run three to ten years. It adds that many investors refinance before the due date, often after stabilizing income or raising value. The main risk it names is being unable to cover the payoff at maturity.
That is why a balloon on an apartment building feels like a deadline. The building may be performing fine. Nothing is wrong with the property. The loan simply has an expiration date, and the lump sum is due whether or not the market cooperates.
A DSCR loan solves this because it measures the property, not your paycheck. DSCR stands for debt service coverage ratio. It asks one question: does the building’s rent cover the new loan’s monthly payment? If it does, and the value supports the loan amount, you have a path out. For the basics, Lendmire’s complete DSCR loans guide walks through the product from the ground up.
Key Terms Defined
Balloon payment: the large lump sum due at the end of a short-term loan, covering whatever balance the smaller payments did not pay down.
DSCR (debt service coverage ratio): the property’s rent divided by its monthly loan obligation. A result of 1.00 means rent exactly covers the payment.
PITIA: principal, interest, taxes, insurance and any association dues. It is the full monthly obligation that DSCR files test rent against.
Rate-and-term refinance: a new loan that pays off the old one and adds little or no cash back to you. Investors also call it a payoff-only refinance.
Cash-out refinance: a new loan larger than the payoff, with the extra equity returned to you in cash.
Amortization: the schedule that pays a loan down over time. A fully amortizing 30-year loan has no balloon at the end.
Seasoning: the waiting period a lender wants after you buy or finance a property before the next transaction.
Prepayment penalty: a fee in the old note for paying it off early.
How Does a DSCR Lender Treat the Old Balloon?
It ignores it. The new lender does not care what the maturing loan’s payment was or how big the balloon is. It cares about three things: what the new payment would be, what the building’s rent supports, and what the building is worth.
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 loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines.
Here is how the math works. The lender divides qualifying monthly rent by the full monthly obligation, meaning PITIA. On larger buildings, some lenders instead use annual net operating income divided by annual debt service. The calculation method varies by program, so the lender you are placed with sets the exact formula.
Run a modeled example. Say your balloon loan was interest-only, and rent covered it at about 1.30x. The new loan is a fully amortizing 30-year fixed. Principal now enters the payment, so coverage on the same rent might land near 1.10x. Those are assumed figures for illustration, not a market quote.
The takeaway: the same rent can produce a lower ratio on the new loan. Check this before you assume the old comfort level carries over.
A few more points on how underwriting treats the file:
- Clearing 1.00 is not positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities and capital expenses sit outside the calculation. A building can pass the test and still be thin in real life.
- Coverage below 1.00 is a separate path. Many select programs start at 1.00. A different set of select lenders in the network will review coverage below 1.00, with leverage and terms adjusted.
Step by Step: From Maturing Note to Paid-Off Balloon
1. Read the existing note. Confirm the maturity date, the exact payoff amount and any prepayment penalty. A penalty changes the cost of leaving early. Also check whether the loan is recourse, meaning you are personally liable.
2. Start early. Appraisal, underwriting and title all take time you do not control. Starting well ahead of maturity leaves room to ask the current lender for an extension if the new loan stalls.
3. Pick the refinance type. A payoff-only refinance retires the balloon and nothing else. A cash-out refinance also returns equity, but it carries a lower leverage ceiling and more scrutiny. Decide which one your goals need.
4. Gather the income file. Expect to provide the rent roll, current leases, a trailing operating statement and insurance details. The appraiser adds the market-rent opinion.
5. Compute coverage on the new loan only. Size the loan, estimate the full monthly obligation, and divide rent by it. If the ratio is thin, adjust the structure before you apply.
6. Run the value test. The appraisal sets the maximum loan. If the payoff plus costs exceeds what the program will lend against value, you bring cash to the table.
7. Clear the borrower review. The lender checks credit, reserves and the entity that will hold title. LLC vesting is common, subject to lender program eligibility.
8. Close and pay off. Title pays the old lender from the new loan’s proceeds. The balloon is retired.
The order of importance, from most to least decisive: rent coverage on the new payment, appraised value against the payoff, how much time remains before maturity, credit and reserves, and the cost of exiting the old loan.
Your Exits Compared
A DSCR refinance is one of several ways out. It is the right one only when the building can carry its own payment.
| Exit | When it fits | Main risk | What it leaves you with |
|---|---|---|---|
| DSCR refinance | Rent covers the new payment; value supports payoff | Low appraisal or thin coverage | A long-term loan, no balloon |
| Extend or modify | Current lender is willing; you need time | Lender may say no or add costs | Same loan, new deadline |
| Sell | Equity is strong; you want out | Sale may not cover the debt | Cash, no building |
| Cash or partners | You can fund the gap | Ties up capital | Smaller loan, more equity |
Many investors pursue the extension and the refinance at the same time. One is the safety net for the other.
Which Loan Structure Ends the Balloon Cycle?
Only a fully amortizing loan does. The spine of the network’s DSCR programs is the 30-year fixed. Select lenders also offer extended terms such as 40-year amortization, interest-only periods and adjustable structures for investors who want them.
| Structure | Balloon at the end? | Best fit |
|---|---|---|
| 30-year fixed | No | Long-term holds, stable payment |
| Interest-only period | Principal still due later | Lower early payment, with a plan |
| Adjustable | No, but payment can reset | Investors planning a shorter hold |
| Short-term loan | Yes | Bridge situations only |
The trap to avoid is balloon-to-balloon. If your new loan is itself a short-term note, you have bought time and nothing else. You will face the same refinance question again, with the same costs.
Interest-only deserves one extra note. It lifts coverage by shrinking the payment tested, but the loan does not pay down during that period. The payment steps up later, so it is a tool for a plan, not an escape from one.
Leverage, Credit and Reserves on a Payoff
The guidelines below are typical ranges across the network, not promises. Every file is reviewed individually, subject to lender guidelines.
- Cash-out refinance: tops out around 75% LTV on an investment property across most of the network. About six months of seasoning is the common expectation.
- Rate-and-term refinance: select programs can reach 85% LTV on an investment property for the strongest files. Most land lower.
- Purchase: most files land at 75% to 80% LTV on an investment property, in case you are buying rather than refinancing.
- Credit: a 620 floor exists in parts of the network. Most programs want around 660, and 700 or higher unlocks the strongest leverage.
- Loan size: up to $3,000,000 on standard programs, with smaller balances routed through select lenders. Above $2,500,000, the network generally holds to 30-year fixed structures.
- Reserves: commonly around six months of PITIA. Conservative rate-and-term files at modest leverage under $1,500,000 can see reserves waived. Loans above that size typically step up to about nine months.
LTV means loan-to-value, the loan amount as a percentage of appraised value. Picture a building where the payoff equals roughly 70% of appraised value. That fits comfortably under a 75% cash-out ceiling. Now picture a payoff near 82% of value. A payoff-only refinance at the highest tier might still work for a strong file. A cash-out would not, and many lenders would ask you to bring cash.
A bigger down payment or pay-down lowers the new payment and can lift the coverage ratio. It never erases leverage caps, credit floors, reserve rules or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
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.
Where the General Rule Breaks
The equity squeeze. If values have dropped since you took out the balloon loan, the payoff may exceed what a new loan can cover against today’s value. Reed Smith’s analysis of the debt maturity wall describes elevated borrowing costs and constrained underwriting as the backdrop for this year’s maturities. In plain terms, lenders are tighter than when many of these loans were written.
Payment shock. A balloon written years ago may have carried a lower borrowing cost than a new loan does today. Even at the same loan size, the new payment can be meaningfully higher. That drags the coverage ratio down, even if the building’s rent never changed.
Thin coverage. An under-rented or half-occupied building may not clear the test on a stabilized basis. Your options include a smaller loan, a lower-coverage program through select lenders with leverage and terms adjusted, a short extension from the current lender, or a bridge loan to finish stabilizing first. Lendmire’s piece How to Bridge a Small Apartment Building With Hard Money Into DSCR covers that last route.
Short ownership history. If you bought the building recently with a short balloon, you may lack operating history. Seasoning rules vary, and cash-out files face the longer wait.
Property types the network does not offer. Manufactured homes (single- and double-wide), log homes and barndominiums are not offered in these DSCR programs. Larger buildings and unusual configurations may also need a different lender type entirely.
Agency-backed debt. The Mortgage Bankers Association reports that about 17% of outstanding commercial and multifamily mortgage balances mature this year, and 13% of multifamily-backed mortgages fall in that group. Only about 4% of government-backed multifamily and health care mortgages come due. Most of the pressure sits with bank, credit union and life company balloons, which are the notes small-building investors usually hold.
What Do Most Investors Get Wrong About Balloons?
Several misconceptions cost owners time.
“The lender will roll my balloon.” Not necessarily. The Consumer Financial Protection Bureau’s balloon payment guidance says you may be able to refinance before the balloon is due, not that you will. It also warns that failing to pay can lead to foreclosure. The page is written for consumer mortgages, so use it for the concept and the risk, not as a rulebook for your commercial note.
“The balloon counts against my coverage ratio.” It does not. Only the new loan’s payment is tested.
“A DSCR loan extends my current loan.” It does not. It is a new loan that pays the old one off.
“DSCR means no underwriting.” There is still an appraisal, a credit and reserve review, and title work.
“The balloon is a small last payment.” The same guidance describes it as generally more than twice the loan’s average monthly payment. On an apartment building, it is often most of the loan.
Entity, Recourse and Title Basics
Most investors hold apartment buildings in an LLC. Whether the new loan can close in that entity depends on lender program eligibility. Some lenders want the borrower entity’s documents reviewed, a guarantor named, or a title vesting change handled at closing.
Recourse terms, meaning whether you are personally liable, differ by lender and by the old note. Do not assume the new loan mirrors the old one. Compare them before you sign.
Title does the quiet work at the end. It confirms the payoff amount with the old lender, clears liens, and pays off the old note from the new loan’s proceeds. Ask the current lender for a written payoff statement early. A prepayment penalty, if one exists, shows up there.
What the Decision Looks Like in Practice
Think of it in three zones, based on how much time remains.
Far from maturity. You have the most options. Run the coverage test now, fix what needs fixing, such as lease-up or deferred rent growth, and apply when the building looks its best on paper. This is also when a cash-out can make sense, since seasoning and appraisal timing are not pressing.
Close to maturity. Narrow the field. Pick a payoff-only refinance, which usually carries simpler underwriting than cash-out. Ask the current lender about an extension in parallel, so you have a fallback. Do not wait for the new loan to be approved before asking.
The refinance falls through. A low appraisal or thin coverage can derail the file. Your remaining paths are a smaller loan with cash brought to closing, an extension or modification, a bridge loan while you fix the problem, or a sale. Each costs something. The earlier you see the problem, the cheaper the fix.
Honestly, the call between a payoff-only and a cash-out is a close one on many files. Cash-out gives you capital for the next deal, but it lowers leverage room and adds a payment that must still clear the test. Payoff-only is the cleaner exit. If the building is thin on coverage, lean toward the simpler path.
Frequently Asked Questions
Can I refinance before the balloon is due?
Usually yes, and most investors do. A new DSCR loan can close and pay off the old note at any point, subject to your prepayment terms and lender guidelines. Check the old note for a penalty before you commit, since it changes the math.
Does the old balloon count against me in the DSCR calculation?
No. The old loan is retired at closing. Only the new loan’s payment goes into the coverage ratio, so a large balloon does not lower your score. What matters is whether rent covers the new payment and whether value supports the loan size.
What if I am close to the maturity date?
Pursue the new loan and an extension at the same time. A payoff-only refinance is typically simpler to underwrite than a cash-out. Keep the current lender informed, because a lender who knows a refinance is in progress may be more willing to extend.
What if my building’s value has dropped?
The appraisal sets the loan ceiling, so a lower value shrinks the maximum loan. If the payoff exceeds what the program will lend against value, you bring cash, pay down the balance, or look at bridge or extension options. Cash-out is the least likely to work in this case.
Is approval certain if the rent covers the payment?
No. Coverage is one test among several. Credit, reserves, property eligibility, appraisal value and entity review all matter, and every file is underwritten individually, subject to lender guidelines. A strong ratio helps, but it does not promise an outcome.
Next Step
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, Lendmire arranges DSCR financing through select lenders in its wholesale network, covering 41 markets including Washington, D.C. Bring the maturity date and the payoff figure, and the conversation starts from there.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage brokerage specializing in DSCR investor loans, helping arrange financing across 41 markets, including Washington, D.C., through wholesale and investor-lending channels. The model centers on property-level rental income reviewed by the lender rather than W-2 documentation, subject to lender guidelines, suiting entity-owned and multi-property investors. Lendmire holds Scotsman Guide Top Mortgage Workplace recognition for 2025 and 2026.
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References
1. LoopNet
2. Reed Smith – The Debt Maturity Wall
3. MBA Newslink – 17% of commercial and multifamily mortgage balances to mature
4. CFPB: What Is a Balloon Payment When Is One Allowed
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 Close a DSCR Loan on a 10-Unit Apartment Building · Can You Get a DSCR Loan on a Kauai Vacation Rental? · How to Prepare Acreage for a Jumbo DSCR Loan Appraisal
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.