The Quick Read: Both options are DSCR cash-out refinances that turn rental equity into build money. The real difference is which rent figure the lender counts: documented short-term rental income with a lower leverage ceiling, or long-term lease rent with a higher one. Pick the path whose income evidence your property can actually prove. Then run coverage on the new, larger balance before you commit.
- On short-term rental collateral, cash-out tops out around 70% LTV. On a standard long-term rental, cash-out tops out around 75% across most of the network.
- The short-term path usually expects about 12 months of hosting history and a 640+ credit score.
- The long-term path leans on a lease or the appraiser’s market rent, and its credit expectations run somewhat higher.
- Both paths size the loan on today’s as-is value, not the value after the addition is built.
- The new payment must be covered by the existing property’s income, because the unbuilt unit earns nothing.
The honest answer is that these two loans fit different owners. The short-term rental path suits an owner whose property has a real hosting track record that beats what a lease would show. The long-term rental path suits an owner with a lease in place, a property that has not been hosted for long, or a thinner short-term record. It also suits an owner who wants more leverage and a simpler file. Neither is better in the abstract. The better one is whichever matches your income evidence.
DSCR Cash-Out Calculator
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As of Nov 5, 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.
This is a DSCR comparison, so the lens is rental coverage, not your personal income. DSCR means debt service coverage ratio. It compares the property’s rent to its full monthly obligation: principal, interest, taxes, insurance, and any HOA dues. The loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. The complete DSCR loans guide walks through the basics if the term is new to you.
Side-by-Side
The table below compares the two paths on how the file is built. Network figures come from the select lenders Lendmire places files with. Each file is underwritten individually, and nothing here is a commitment to lend.
| Factor | Short-Term Rental Cash-Out | Long-Term Rental Cash-Out |
|---|---|---|
| Income basis | Hosting income or projection | Lease or appraiser market rent |
| Typical cash-out LTV | Up to about 70% (STR collateral) | Up to about 75% |
| Credit score | 640+ expected | About 660 typical; 700+ for top tiers |
| History expected | About 12 months of hosting | Lease in place or market rent |
| Documentation | Platform history, manager statements, or projection | Lease and rent schedule |
| Property types | 1-4 units; legal STR use required | 1-4 units; rentable as long-term |
| Seasoning | Varies by program | About 6 months common |
Two notes on the table. First, reserves vary by lender, leverage, loan size, and transaction type. Cash-out files at higher leverage are the ones where lenders look hardest. Second, 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. It is a different path, not the same program with a lower floor.
Loan sizes run roughly up to $3,000,000 on standard programs. Above $2,500,000 the network generally holds to 30-year fixed structures. Extended terms and interest-only periods are available through select lenders in the network.
Key Terms Defined
Cash-out refinance: a new loan that replaces your current mortgage and pays you the difference between the new balance and the old payoff, which you can spend on the build.
DSCR: the rent a lender counts divided by the property’s full monthly obligation. A result of 1.00 means rent equals the obligation.
PITIA: principal, interest, taxes, insurance, and association dues, the full monthly obligation used in the DSCR calculation.
Seasoning: the waiting period a lender wants between buying a property, or a prior financing event, and the next refinance.
Form 1007: the appraiser’s rent schedule for a one-unit property. It documents monthly market rent from long-term comparables.
ADU: an accessory dwelling unit, a second small home on the same lot as the main house, such as a backyard cottage or garage conversion.
How Both Loans Work for a Build
Both loans work the same way once the income is established. You refinance the property, the new loan pays off the old one, and the cash that is left over pays for the addition or ADU. The lender sizes the loan on the property’s current appraised value, not on what it will be worth after construction. The Urban Institute makes the same point about cash-out refinances in general: they consider only the current property value, while renovation and construction loans look at after-repair value. The sizing logic is the same, and the network sets its own limits.
That has three practical consequences.
- The unbuilt unit earns nothing. Coverage is tested on the existing rent against a payment that now includes the build money. Run it with and without the future unit, and trust only the version without.
- A bigger cash-out thins coverage. More borrowed dollars means a bigger payment on the same rent. Pulling the maximum can still pass DSCR and strain your real budget.
- The DSCR is not cash flow. It compares rent to PITIA only. Repairs, vacancy, management, utilities, and capex sit outside the calculation. A property can clear 1.00 and still lose money each month.
A ground-up addition on a large scale usually needs construction financing first. After the space is finished and rentable, a DSCR refinance can take that loan out. A cash-out refinance works best when your equity can fund the build directly.
The Appraisal Is Where the Paths Split
The long-term path is straightforward on appraisal. One-unit properties use Form 1007 and two- to four-unit properties use Form 1025. Fannie Mae’s selling guide describes both forms. DSCR loans are not agency products and each lender sets its own file rules. The form names and what the forms measure are still useful, because DSCR appraisals borrow them.
The short-term path is trickier. Fannie Mae’s appraiser guidance says Form 1007 supports monthly market rent built from comparables leased monthly. It also says the form cannot be used to estimate a nightly fee for a short-term rental. McKissock, an appraiser-education provider, adds that the form documents monthly rent rather than business income. It also says furniture and business income are excluded from value, and that short-term use does not change the property’s value. The lender makes the final income call.
So the appraisal tells the lender what the building is worth and what it would rent for on a long-term lease. It does not prove what your guests pay. Short-term income comes from other evidence. That can be 12 months of platform payouts or bank deposits, a manager statement, or a market-data projection. Some appraisers also add a narrative short-term income analysis, though a lender may rely on a third-party data report instead.
Why does this matter for your choice? HousingWire reports that relying on the 1007 for short-term properties can produce artificially low DSCRs in non-QM lending. If a program defaults to long-term rent, a property that clears comfortably on nightly income can look thin on paper. Match the program to the evidence you hold.
When the Short-Term Rental Cash-Out Is the Better Fit
Choose the short-term path when your documented hosting income is the stronger number and you can prove it. It fits an owner who has hosted the property for about 12 months and has the platform history to show it. It also fits an owner whose property sits in a place where short-term use is legal and permitted.
The program works on a 640+ credit score. It tops out around 70% LTV on cash-out refinances, so you accept less borrowing power in exchange for counting the stronger income. 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. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
This path also suits an addition that improves the hosting product. A bigger home with more bedrooms or a guest unit can support the nightly income the loan counts. It matters in one specific way. The addition is paid for now, but the lender counts only the history you already have. A new unit adds no history on day one.
Consider a scenario with a hypothetical lakefront duplex in a resort area, hosted for a year. The platform record shows coverage around 1.3x on short-term income. The long-term rent from the appraisal would put coverage in the mid-1.0 range. The short-term path counts the stronger figure and gives up some leverage. If the owner’s equity is deep enough, that trade is easy. These numbers are modeled assumptions, not market data.
Recent conversions need extra care. If you switched the property from a long-term lease to hosting recently, only the months since the switch count as hosting history on programs that require a trailing record. Some programs fall back to market rent. That is the point where the long-term path starts to look better.
The short-term path is a poor choice in a few situations:
- The hosting record is thin, seasonal, or only a few months old.
- Local rules or HOA terms put the legal status of short-term use in doubt.
- The numbers only work if you count income from the unit you have not built.
When the Long-Term Rental Loan Is the Better Fit
Choose the long-term path when the lease or market rent is your reliable number and you want more borrowing room. It tops out around 75% LTV on cash-out for standard rentals, about five points above the short-term ceiling. That extra room can matter when the build budget is large relative to your equity. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Credit expectations are a little higher here than on the short-term path: a score near 660 is typical, though a 620 floor exists in parts of the network, and 700+ unlocks the strongest leverage tiers. About 6 months of seasoning is the common expectation. The documents are simpler: a lease or the appraiser’s rent schedule.
This path fits several owners:
- A buy-and-hold landlord with tenants in place.
- An owner converting from short-term to long-term use.
- An owner whose property has not been hosted for long enough to show history.
- An owner whose local short-term rules are uncertain, since the long-term file does not depend on them.
Take the same hypothetical duplex but with a landlord and a lease in place. Coverage on the lease is around 1.1x before the build. The cash-out pulls up to 75% LTV, and the larger balance pushes coverage down toward the 1.0 line. This landlord should pull less than the maximum, because coverage that clears on the old balance could fall short of 1.00 on the new one. A lower-leverage structure, an interest-only period, or a sub-1.00 program from select lenders, with leverage and terms adjusted, could change the picture. Whether any of those apply depends on lender guidelines, credit approval, and property review. Again, these figures are modeled assumptions.
The long-term path also keeps its simplicity after the build. If the addition becomes a long-term rental unit, the next refinance counts the lease rent on both units. Permitted space generally gets counted, and unpermitted space is generally left out of value and income. An ADU generally cannot be sold separately from the main property.
Where Both Paths Run Into Trouble
Some problems apply to either path. Knowing them before you apply saves work.
Permits. An addition or ADU built without permits can cause problems at the next appraisal, with insurance, and at resale. Build it legally, and keep the paperwork.
Entity vesting. Many DSCR files close in an LLC, subject to lender program eligibility. The vesting you want should be settled before the appraisal, not after.
Property type. DSCR financing through the network is not offered on manufactured homes, whether single- or double-wide, on log homes, or on barndominiums. If your ADU plan involves a manufactured unit, that fact matters at the refinance stage.
Reserves. Cash-out files commonly need about 6 months of PITIA in reserves, though that varies by lender, leverage, loan size, and transaction type. Loans above $1,500,000 typically step up to about 9 months. Build money does not count as your reserves if you spend it.
Seasoning. A recent purchase may need to wait before a cash-out refinance, and programs differ on how they count it. Ask about the waiting period before you plan the build, since it affects when you can start.
The build gap. The addition draws on loan proceeds after closing. Costs run over, and the unit adds no income until it is finished and leased. Keep a buffer.
Taxes. 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.
A Decision Checklist
Work through these questions in order.
1. Can you prove 12 months of hosting income? If yes, the short-term path is a real option. If not, the long-term path is likely the cleaner file.
2. Is short-term use legal and permitted for this property? If you are unsure, resolve that first. If it fails, the long-term path is the one to use.
3. Which income number is stronger, and by how much? A large gap favors the short-term path despite the lower leverage ceiling. A small gap favors the higher long-term LTV.
4. How much equity do you have against the build budget? A thin cushion at 70% LTV can make the short-term path too small.
5. Does coverage hold after the new payment, with no credit for the new unit? If it does not, reduce the cash-out or look at structures with interest-only periods, which select lenders offer.
6. What is the plan for the finished space? If it will be hosted, the short-term path matches. If it will be leased long term, the long-term path matches. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Two further points keep expectations realistic. A larger down payment, or a smaller cash-out, lowers the payment and can lift the DSCR. It never erases leverage caps, credit floors, reserve rules, or property eligibility. The strongest files clear two tests: enough equity and enough rental coverage.
The Verdict
Choose by evidence, not by preference. If you hold a clean 12-month hosting record on a legally operating property, the short-term cash-out counts your stronger income, and the lower ceiling of about 70% LTV on short-term collateral is the price. If you hold a lease, a young property, or a shaky hosting record, the long-term loan gives you a simpler file and more room, with a ceiling around 75% LTV on standard rentals. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
In both cases, size the build to the existing rent, not to the unit you plan to add. It is a close call for owners whose short-term income only modestly beats the lease rent. The higher leverage on the long-term path might fund a larger build, while the short-term path might leave more coverage cushion. Run both versions before deciding.
Frequently Asked Questions
Can a short-term rental cash-out refinance pay for an ADU?
Yes, when the property is reviewed on its existing income. The loan is sized on current appraised value, and you spend the proceeds on the build after closing. On short-term rental collateral, cash-out tops out around 70% LTV, with a 640+ score and about 12 months of hosting history expected. Qualification is subject to lender guidelines.
Does the lender count income from the ADU before it is built?
Not on a cash-out refinance. The unbuilt unit has no lease and no hosting history, so the existing property’s income has to cover the new payment. Run your coverage without the future unit. Once the unit is finished, permitted, and leased, a later refinance can count its rent.
Why can the same property look different under the two paths?
Because the income figures differ. The long-term path counts lease rent or the appraiser’s monthly market rent. The short-term path counts hosting income from platform history or a projection. A strong hosting property can show noticeably higher coverage on its nightly income than on its long-term rent.
Can I use Form 1007 to prove my short-term rental income?
No. Form 1007 documents monthly market rent from long-term comparables. It does not estimate a nightly fee or business income, so do not multiply a nightly rate by 30 and call it supported. Lenders rely on platform history, manager statements, or projections for that.
Is a DSCR loan the same as a construction loan?
No. A DSCR cash-out refinance gives you a lump sum at closing, sized on current value, and the lender looks at rental coverage. A construction loan funds a build in stages and looks at after-completion value. Some investors use construction financing first and refinance into a DSCR loan once the property is finished and earning rent.
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 mortgage broker arranging financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. You can request a quote at Lendmire’s quote page or call 828-256-2183.
The clearest tell on any addition or ADU plan is how little of the finished unit’s income the first refinance is allowed to count.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 41 markets, including Washington, D.C. The property’s rental income, not the borrower’s tax returns, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Urban Institute: Financing Accessory Dwelling Units
2. Fannie Mae Selling Guide B4-1.2-01
3. Fannie Mae Appraiser Update
4. McKissock
5. HousingWire: Short-Term Rentals and the Appraisal Playbook
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 Do a Cash-Out Refinance on a Rental as an Investor · How to Get a Short-Term Rental Cash-Out While Rebuilding After a Storm · How Much Cash Comes Out of a Short-Term Rental Cash-Out Refinance to Buy Out an Ex-Spouse?
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.