The Quick Read: On most cash-out files, the lender counts the lower of the signed lease and the appraiser’s market rent, so a below-market lease holds the coverage ratio at the lease figure. The appraiser does not lower market rent because your tenant pays less, which means the lease becomes the cap. A lower counted rent reduces the ratio and shrinks the loan the property can carry, subject to lender guidelines.
- Rent is the numerator, and the full payment on the new, larger loan is the denominator.
- Cash-out on a standard rental tops out around 75% LTV across most of the wholesale network, with about 6 months of seasoning.
- A below-market lease can cut the maximum loan by more than the rent shortfall, because taxes and insurance do not shrink with the rent.
- Fixes exist, ordered from light to heavy: take less cash, renew at market rent, pay down, wait, or split the deal into two steps.
- Which rent counts is program-specific. Ask before the appraisal is ordered. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
What Does a DSCR Cash-Out Refinance Require on a Standard Rental?
A DSCR cash-out refinance requires enough equity under the leverage cap, enough rental coverage on the new payment, and a clean property and borrower file. Across most programs in Lendmire’s wholesale network, cash-out on a standard rental tops out around 75% LTV. All of these figures are subject to lender guidelines, and every file is underwritten individually.
DSCR Cash-Out Calculator
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Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 29, 2026
Prefilled with starting assumptions — enter your property’s value, balance, taxes, and insurance for a more accurate picture.
Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Oct 29, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Property value, balance, taxes, and insurance are editable estimates. Maximum loan-to-value varies by lender, program, property type, and seasoning. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Here is how the main parameters usually read on files placed through the network:
| Requirement | Typical range |
|---|---|
| Cash-out LTV, standard rental | Up to about 75% |
| Seasoning | About 6 months of ownership, measured from title recording |
| Coverage ratio | 1.00 is where select programs start |
| Credit score | 620 floor in parts of the network; most want about 660; 700+ opens the strongest tiers |
| Reserves | Commonly about 6 months of PITIA; about 9 months above $1,500,000 |
| Loan size | Up to $3,000,000 on standard programs |
PITIA is principal, interest, taxes, insurance, and any HOA dues. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Properties such as manufactured homes, log homes, and barndominiums are not offered in these DSCR programs.
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 income does the heavy lifting. The loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. For the broader picture, see Lendmire’s complete DSCR loans guide.
One more point before the lease question. Clearing 1.00 is not the same as positive cash flow. The ratio compares rent to PITIA only. Repairs, vacancy, management, utilities, and capex sit outside it.
Which Rent Does the Lender Count When the Lease Is Below Market?
On most programs, the counted rent on a cash-out is the lower of the signed lease and the appraiser’s market rent. Some programs lean on the appraisal figure alone. Others allow a variance when a lease exists. No regulation sets this, so each program decides.
The market rent comes from the appraisal. For a single-family or condo investment property, the appraiser completes a rent schedule form that is attached to the report. Fannie Mae publishes it as Form 1007, and Freddie Mac publishes the same form as Form 1000. DSCR programs borrow the form only as a standard way to document market rent. The agencies’ own lending rules do not govern DSCR files.
The form uses comparable rentals, not your tenant. McKissock notes that Form 1007 estimates monthly market rent for one-unit properties and that on refinances it is used alongside lease agreements or tax returns. So the appraiser sets a market figure. The lender then compares it to your lease.
Here is how the three common approaches play out:
- Lower-of: The lease is below market, so the lease counts. This is the most common read on cash-out files.
- Appraisal only: The market rent counts and the lease is ignored. This helps a below-market lease, but the same program also ignores an above-market lease.
- Lease when one exists: The lease counts, and market rent is the fallback for vacant units.
Across the network, some lenders are flexible and some are strict. Strict overlays want the lease, deposit proof, and the appraisal to agree closely. Ask which approach applies before anyone orders the appraisal. The answer changes the strategy.
What Does a Below-Market Lease Do to the Ratio?
The ratio falls in direct proportion to the rent shortfall. Counted rent drops by the percentage the lease sits below market, and the payment on the new loan does not move.
Run the numbers on a modeled assumption. Say market rent would support a coverage ratio of about 1.25x on the new loan. The tenant pays 15% below market, so counted rent is 85% of market. Coverage falls to roughly 1.06x (1.25 × 0.85). That is still above 1.00, but the cushion is gone. A property that cleared at 1.10x on market rent would land just under 1.00x, where a program that starts at 1.00 would not apply.
If a file lands below 1.00x, there is a separate path. Select lenders in the network take sub-1.00 coverage, with LTV and terms adjusted. That route is a different program, not a lower floor on the same one, and it is not the default for a cash-out.
The bigger hit is to loan size. Taxes and insurance stay fixed when rent drops, so the rent shortfall comes entirely out of the principal-and-interest budget. Take another modeled assumption. At market rent, taxes and insurance consume a fifth of the rent-supported payment budget at a 1.00 coverage target. A 15% rent cut leaves about 65% of market rent, against 80% of market rent that was available for principal and interest before. That is roughly 19% less loan capacity, more than the 15% rent cut. Higher taxes, insurance, or HOA dues make the gap wider.
Rent Test vs Equity Test: Which Limit Binds?
The smaller of two numbers sets the loan: what the value allows and what the rent allows. A below-market lease only matters when the rent test is the tighter one.
The value test is simple. Take the appraised value and apply the cash-out LTV cap, about 75% on a standard rental across most of the network. The rent test asks a different question: what is the largest loan the counted rent can carry at the required coverage?
Consider three situations:
1. Low equity, low rent. The property has a thin equity cushion and a below-market lease. The value test binds first. Fixing the lease changes nothing, because leverage was already the limit.
2. High equity, low rent. The owner bought years ago, values rose, and the tenant is on a legacy lease. The rent test binds. This is the file where a below-market lease costs the most, because there is plenty of equity the rent cannot support.
3. High equity, market rent. Both tests are comfortable, and the cap is the 75% ceiling.
This is a toss-up for many owners. Some hold a legacy tenant because the tenant is reliable and pays on time. That is a sound choice. It simply carries a cost at refinance, and the cost shows up as less cash. The decision is whether the extra cash is worth disturbing a good tenancy.
A larger down payment on a purchase lifts coverage by lowering the payment. On a refinance, the equivalent is taking less cash. Neither erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
How Do Different Lease Situations Read?
Each lease situation has a usual treatment, though programs differ. The table summarizes how counted rent typically reads on a cash-out.
| Situation | Typical counted rent |
|---|---|
| Lease below market | The lease (lower-of programs) |
| Lease above market | Market rent, capped at the appraisal |
| Lease at market | Either figure; they match |
| Vacant | Market rent alone |
| Month-to-month or expired | Often market rent, with payment history as support |
| Family or related-party lease | The lower figure, with an arm’s-length lease expected |
| Inherited legacy tenant | Varies; some programs use market rent, others still use the lease |
A few notes on the harder rows.
Month-to-month and expired leases. Many programs treat these like a vacant unit and count market rent. They still want proof the tenant pays, such as deposits. This can help an owner with a low rent who never renewed the paper lease. Confirm it with the program first. It is not universal.
Family leases. A below-market lease to a relative draws more scrutiny. Expect the lender to want proof of an arm’s-length arrangement and actual payments. Lendmire’s piece How Much a Below-Market Family Lease Cuts a Rental Cash-Out Refinance covers that case in detail, so this article leaves it there.
Above-market leases. The ratio does not improve. Most programs cap counted rent at the appraisal figure. Some give limited credit when there is a documented payment history, but treat that as a program-specific feature, not a plan.
How Do You Fix a Below-Market Lease Before Cash-Out?
Start with the lightest fix and move down only if the file still falls short. Each option costs something, and the right one depends on which test is binding.
1. Take less cash. This is the cleanest fix. A smaller loan carries a smaller payment, and coverage rises. No tenant conversation is needed.
2. Renew at a supportable market rent before the appraisal. This only works if the lease, not the appraisal, was the lower figure, and it needs the tenant’s agreement. The new rent should match what comparable rentals support. A lease signed to inflate the number past the appraisal does nothing, since counted rent is capped at market.
3. Pay down at closing. Bringing cash to the table shrinks the loan and lifts the ratio. This defeats part of the purpose of a cash-out, so it fits only when the goal is a rate-and-term outcome with a little cash.
4. Wait for the lease to expire and re-lease at market. Free, but slow, and the equity sits idle meanwhile.
5. Rate-and-term now, cash-out later. This resets the loan without returning cash. The cost is a second closing and a new seasoning clock. A refinance that returns cash is a cash-out, so the later step carries the 75% cap.
6. Request an appraisal reconsideration. If the appraiser’s rent comps are weak, a documented packet with recent nearby rentals can be submitted. Reconsideration is at the lender’s discretion, and a dispute backed only by your lease rarely moves the number, since the lease is the figure that is already low.
One warning. Do not sign a cheap lease just before the appraisal, and do not push a tenant into a higher rent without checking local rules. The goal is a lease that stands on its own as arm’s-length.
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.
What Documents Does the Lender Want for a Below-Market Lease?
The file needs the signed lease, proof of payment, and the appraisal with its rent schedule. Clean paperwork gives the lender fewer gaps to review.
- The executed lease and any amendments.
- Proof the tenant pays: deposits or a payment ledger.
- The rent schedule from the appraisal. A single-family or condo property uses the 1007. Properties with 2-4 units use a separate operating income form, and larger properties get a commercial-style analysis.
- Entity documents when the property is titled in an LLC, subject to program terms.
- Reserves documentation, since reserves are commonly about 6 months of PITIA and about 9 months on loans above $1,500,000.
- The prior settlement statement, which shows ownership dates for seasoning.
A frequent failure mode is a lease and a payment ledger that disagree. If rent was reduced informally mid-lease, the ledger shows lower payments than the lease says. Underwriters count what is paid, not what is written. Fix the records before they go in.
Where Does the General Rule Break?
Four edge cases need separate handling: short-term rentals, future rent bumps, appraisal disputes, and inherited tenants.
Short-term rentals. The 1007 documents monthly rent. It does not capture nightly income, and per McKissock’s overview, the form is built for monthly market rent. Short-term rental cash-out sits on its own track in the network: leverage around 70% on cash-out, a 640+ score, and about 12 months of hosting history, with 1.00 coverage on refinances. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Appraisal disputes. When a lease sits above the 1007 figure, a dispute usually fails unless the appraiser missed obvious comps. When the lease is below market, a dispute is rarely needed. The lender will count the lease.
Inherited legacy tenants. Some programs fall back to market rent when a tenancy was inherited or is below market for non-arm’s-length reasons. Others still use the lower figure. The file should say plainly why the rent is low.
Future rent bumps. Underwriting does not credit rent before it is paid. A signed increase that starts after closing does not count.
One more detail. Cash-out proceeds are a funding decision, not just a coverage one. 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.
Key Terms Defined
DSCR (debt service coverage ratio): Counted rent divided by the full monthly payment, including principal, interest, taxes, insurance, and HOA dues.
Lower-of rule: The practice of counting the smaller of the signed lease and the appraiser’s market rent.
Market rent: The monthly rent comparable rentals support, as estimated by the appraiser on the rent schedule form.
Form 1007 / Form 1000: The single-family comparable rent schedule an appraiser attaches to the report. Freddie Mac publishes it under the second number.
Seasoning: The ownership period required before cash-out is available, about 6 months on most files, measured from title recording.
PITIA: Principal, interest, taxes, insurance, and association dues. The full payment the rent must cover.
What Are the Common Mistakes?
- Assuming the signed lease is always the rent number. When the appraisal is lower, it is not.
- Assuming market rent wins on a below-market lease. Under lower-of programs, the lease stays.
- Counting a future rent bump that has not been paid yet.
- Using listing screenshots or asking rents to override the appraiser.
- Skipping the question of which rent basis applies before ordering the appraisal.
- Treating a cleared coverage ratio as proof the property cash-flows.
Frequently Asked Questions
Can I still do a DSCR cash-out refinance if my tenant pays below market?
Yes, often. The loan is sized on counted rent, so a below-market lease means a lower ratio and a smaller loan, not an automatic denial. If equity is the tighter limit anyway, the lease may not matter. Eligibility review depends on lender guidelines, credit, reserves, and property review.
Will the appraiser lower market rent because my tenant pays less?
No. The appraiser builds market rent from comparable rentals, not from your tenant’s payment. That is why the lease becomes the cap on lower-of programs. The appraisal figure stays at market.
Does raising rent right before the refinance help?
It can, when the lease was the lower figure and the new rent is supportable by comparables. Counted rent is still capped at market on lower-of programs, so raising rent above the appraisal does nothing. Underwriting also does not credit a rent increase that starts after closing.
What if the ratio lands below 1.00 because of the low lease?
Many select programs start at 1.00, so the file may need adjusting. Taking less cash or waiting for a re-lease at market are the other options.
Is a month-to-month tenant better or worse than a below-market lease?
It depends on the program. Many treat month-to-month like a vacant unit and count market rent, which can help. Others still want the payment history. Confirm which approach applies before the appraisal is ordered.
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. Lendmire is a broker arranging financing through select lenders in its wholesale network, across 41 markets, including Washington, D.C. Every file is subject to lender guidelines and is not a commitment to lend.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage focused on DSCR investor financing, helping arrange programs through wholesale and investor-lending channels in 41 markets, including Washington, D.C. DSCR loans are evaluated by the lender on property cash flow rather than personal income, subject to lender guidelines, supporting LLC closings and accommodating investors with four or more financed properties. Scotsman Guide Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae, Single-Family Comparable Rent Schedule (Form 1007)
3. McKissock, Form 1007 and Its Impact on Short-Term Rental Appraisals
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How to Maximize the Cash You Take Out on a DSCR Refinance · Can a Gatlinburg Cabin Qualify for a DSCR Cash-Out Refinance? · Can a First-Time Investor Get Max LTV on a DSCR Cash-Out Refinance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.