The Quick Read: To document a family loan before a rental cash-out refinance, put the loan in a signed written note, prove the money moved and the payments happened, and tell your loan broker how it was funded before the file goes in.
- Decide first whether the money is a gift or a loan, then keep every document consistent with that choice.
- A signed promissory note, a payment ledger, and bank records of every transfer form the core paper trail.
- Know whether the note is secured by the property. A recorded lien shows up in title and changes the structure of the refinance.
- Borrowed family money is not your own funds, so it generally cannot stand in for reserves.
- On most files, a cash-out refinance on a standard rental tops out around 75% LTV after about 6 months of ownership, subject to lender guidelines.
Why Family Money Raises Questions on a Cash-Out File
A cash-out refinance replaces your current loan with a larger one and hands you the difference. You use the equity in the rental instead of selling it. A DSCR loan, short for debt service coverage ratio loan, qualifies primarily on property-level rental income covering the payment, subject to lender guidelines.
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That focus on the property sounds like it should make family money irrelevant. It does not. Lenders still look at where your cash came from, what you owe, and what sits on the title.
Across the wholesale network of lenders Lendmire works with, the same three questions come up when a relative’s money touches a rental file:
- Did family money fund the purchase or the rehab?
- Is any of it still owed, and is that debt secured by the property?
- Will the new loan proceeds repay the relative?
Clean answers keep the file on the property-income track. Vague answers turn into letters of explanation, extra conditions, and sometimes a lender who walks away. A letter of explanation (LOE) is a short signed statement that explains an unusual deposit or debt.
Key Terms Defined
Promissory note: A signed written promise to repay a set amount, with stated interest, a payment schedule, and default terms.
Lien: A legal claim against the property that title work will find and that must be paid off or dealt with at closing.
PITIA: The monthly principal, interest, taxes, insurance, and association dues on the property. DSCR compares rent to this number.
Seasoning: The waiting period a lender wants between buying a property and refinancing it with cash out. On most files that is about 6 months from title recording.
Source of funds: The paper trail showing where your cash came from, usually bank statements with matching account names.
Reserves: Your own liquid money left over after closing, commonly around 6 months of PITIA on cash-out files.
Gift or Loan? Pick One and Stay Consistent
A gift has no repayment expectation, and it is permanent. A loan is a debtor-creditor relationship with repayment terms. The two cannot be the same dollars.
Here is the trap. A relative hands you money, and your family treats it as a loan. Then a lender asks, and someone calls it a gift because that sounds simpler. Now your documents contradict each other.
A gift letter usually states that the donor expects nothing back. If your family books say you owe the money, the letter is false. Pick the true description and make every document match it.
Gift funds are generally a purchase-side concept in non-QM lending. They are not a refinance tool. A gift letter attached to a cash-out file often does not fit program rules, so a documented loan is usually the honest structure for a refinance.
How to Document a Family Loan Step by Step
Do the paperwork before the money moves. If the money already moved, jump to the fix-it section below.
1. Write the promissory note. Include the lender and borrower names, the amount, the date, the interest, the payment schedule, the maturity date, late and default terms, and whether prepayment is allowed. Both parties sign. A notary is not always required, but notarized signatures make the note harder to dispute, and some states have their own formalities.
2. Name the borrower correctly. If an LLC owns the rental, the note should say whether you borrow personally or the entity borrows. Funds should land in the account that matches the borrower or vesting entity, subject to program terms on LLC-titled files.
3. Move the money in a traceable way. Use a wire or an ACH transfer from the relative’s account to yours. Cash handoffs leave no trail.
4. Pay as the note says. Every payment goes through a bank account. Keep a ledger showing the date, the amount, and the running balance.
5. Keep the file together. Store the signed note, the transfer confirmations, the ledger, and any payoff letter in one folder. Your broker can hand it to the lender in one piece.
The Core Document Set
| Document | Purpose | Who signs |
|---|---|---|
| Promissory note | Proves loan terms | Borrower and relative |
| Payment ledger | Shows the loan is honored | Kept by both |
| Wire or ACH records | Proves funds moved | Banks issue |
| Security instrument | Creates a lien, if any | Borrower, recorded |
| Payoff letter | Confirms balance at closing | Relative |
The security instrument is the only row that is optional. Everything else belongs in the file.
Interest and Tax: Keep It Simple
A loan between relatives generally should carry at least the minimum interest the IRS publishes each month, called the applicable federal rate. The IRS sorts these rates into short-term, mid-term, and long-term tiers based on how long the loan runs, and IRS Internal Revenue Bulletin 2026-32 shows how those tiers are laid out. Check the monthly rate on the IRS site when you write the note, rather than copying a number from an article.
Charging less than that minimum does not turn the whole principal into a gift. It generally creates a deemed gift of the interest you skipped. A loan that is not treated like a loan at all, with no payments and no note, is the version that invites bigger trouble. Tax treatment varies; consult a qualified professional before relying on any deduction or reporting position.
Secured or Unsecured? This Decides What Title Sees
An unsecured family note is a promise with no claim on the property. Title work usually finds nothing, and the cash-out lender has no lien to pay off or subordinate.
A secured note is different. If the family loan is backed by a recorded mortgage or deed of trust on the rental, title will find it. That lien has to be paid off at closing, or it must be dealt with in the structure of the new loan.
Treat these as questions to put to your broker, the lender, and the title company before you sign anything:
- Will you record the lien, or keep the note unsecured?
- If a lien exists, will the refinance pay it off at closing?
- Who prepares the release or satisfaction once it is paid?
Secured family debt also matters on the purchase side. Delayed financing is a path for cash buyers who want to refinance soon after buying. It generally excludes purchases funded by a loan secured on the same property. A family note that is not secured by the property does not fall into that exclusion by default, but a secured one would.
What Underwriters Check in a Family-Loan File
Seasoning and original funding. If you refinance close to the seasoning window, the lender may size the loan off your documented basis. That means they want to see how the original purchase was funded. Family-funded purchases can trigger extra questions about both the funding and whether the original sale was arm’s length.
Source of funds. Statements should be complete, and account names should match the borrower or vesting entity. Unusual deposits need a LOE. Large deposits generally need sourcing, and one wholesale non-QM guideline set spells out a threshold for when a deposit must be traced. A family loan landing in your account right before the file goes in is exactly that kind of deposit.
Reserves. This is the classic problem file. A relative lends you money, you park it in your account, and it looks like reserves. It is not. Borrowed money is not your own money, and lenders generally want reserves from your own verified funds. Across the network, reserves commonly run around 6 months of PITIA, stepping up to about 9 months on loans above $1,500,000, and they vary by lender, leverage, and loan size.
Coverage. The DSCR test compares monthly rent to PITIA. A payment on an unsecured family note generally is not part of PITIA, but confirm that with the specific lender. Also remember that clearing 1.00 coverage is not the same as positive cash flow, because repairs, vacancy, management, and capital expenses sit outside the calculation.
Where the Proceeds Go Matters
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 Federal Register’s ability-to-repay rulemaking confirms that business-purpose and investment loans sit outside that consumer rule. That treatment turns on the purpose of the credit.
The practical lesson is to state your use of proceeds accurately. If cash-out money repays a relative who financed the rental, say so. If you plan to spend it on personal expenses, tell your broker, because a lender may treat that purpose differently and ask for a business-purpose declaration.
Repaying the family lender at closing is a common plan. If the relative then gifts some of the money back, document that separately, with its own letter and its own bank trail. Do not blend the two stories.
A Sample Timeline for a Repayment at Closing
Consider a scenario where a relative lent you money to fund part of the purchase of a duplex. You want to refinance after seasoning and use part of the proceeds to repay the loan.
1. Before any money moves: Sign the note, record the interest terms, and decide whether the note is secured.
2. At funding: Send the money by wire or ACH, and save both banks’ confirmations.
3. During ownership: Make payments on schedule and update the ledger each time.
4. Before you apply: Tell your broker about the loan, how the purchase was funded, and that the note will be repaid from proceeds.
5. During the file: Provide the note, the ledger, the transfer records, and any LOE the lender requests.
6. At closing: Title shows the payoff, the relative signs the payoff letter, and a release is prepared if there was a lien.
On a standard rental with this cash-out structure, most files in the network top out around 75% LTV, with about 6 months of ownership as the common seasoning expectation. The proceeds that repay the relative reduce what you keep. Equity available depends on rent used for lender review, PITIA, reserves, and the leverage cap, so it is not a guaranteed figure.
For more on picking the right window to refinance, see Lendmire’s piece How to Time a Rental Cash-Out Refinance Before the Next Purchase.
Common Mistakes and How to Fix an Undocumented Loan
Mistakes show up the same way again and again:
- A handshake deal with no note.
- A note signed later and dated to look earlier.
- Cash payments with no record.
- Family money mixed into the account that holds your reserves.
- A gift letter for what is actually a loan.
The fix for an undocumented loan is honesty with today’s date. Write the note now and date it when it is signed. Add a short statement describing when the money actually moved and what has been paid so far. Back-dating is the one thing you must not do, because a back-dated note can look like fabrication.
If the money is a gift, say that plainly and stop treating it as owed. Do not split the difference.
Where DSCR Programs Fit
Across the network, purchase leverage mostly lands at 75% to 80% LTV on an investment property, and cash-out refinances stop around 75% LTV on standard rentals. Credit floors begin at 620 in parts of the network, most programs want around 660, and 700 or above unlocks the strongest leverage tiers. Coverage of 1.00 is where select programs start, while a separate select-lender path takes coverage below 1.00 with leverage and terms adjusted. Loan sizes run up to $3,000,000 on standard programs.
A strong family-loan file does not change those caps. It protects your eligibility within them. The strongest files clear both tests: enough equity and enough rental coverage. For the full picture, read Lendmire’s complete DSCR loans guide.
If this is your first rental, the same paper-trail habits apply, and Lendmire’s article Cash-Out Refinance on Your First Rental Before You Apply covers the basics before you apply.
Frequently Asked Questions
Do I need a notary to document a family loan?
Not always, but it helps. A notary confirms who signed and when, which makes the note harder to dispute. Some states set their own formalities for notes and security instruments, so ask an attorney about your state.
Does a family loan count against my DSCR?
Generally no. DSCR compares rent to PITIA, and a payment on an unsecured family note usually is not part of PITIA. Confirm with the lender, because treatment can vary, and a secured family lien changes the structure of the refinance.
Can I call the money a gift to make the file simpler?
Only if it truly is a gift with no repayment expected. Calling a loan a gift to a lender while your family books show it as owed creates a contradiction. Gift funds are also generally a purchase-side concept, not a refinance one.
Can the cash-out proceeds repay my relative?
Yes, in many structures, with a payoff letter and a clear statement of the use of proceeds. If the note is secured, title will require a release at closing. Tell your broker before you apply so the file is built around the payoff.
Can I paper the loan after the money has moved?
Yes, with honest dating. Write the note today, date it today, and add a statement explaining when the funds moved and what has been paid. Never back-date it, and keep the original bank records of the transfer.
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., and every file is underwritten individually, with no commitment to lend until a lender approves it.
For the mechanics of pulling equity out of a rental property, see Lendmire’s guide to cash-out refinance on an investment property.
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. IRS – Internal Revenue Bulletin 2026-32
2. NonQM Underwriting Guidelines
3. Federal Register – Ability-to-Repay and Qualified Mortgage Standards
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: Do All DSCR Cash-Out Loans Carry an Early Exit Fee? · How to Cash-Out Refinance a 2–4 Unit Rental From Start to Close · How to Document a Cash Purchase for Delayed Financing on a Duplex
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.