The Quick Read: A DSCR lender treats the option fee as a one-time payment for the right to buy, so it sits outside the rent-versus-PITIA test, and a recorded memorandum of option is reviewed as a title and exit issue, not as income. Coverage is built from the lease and the appraiser’s market rent, and the recorded option shows up in title work as an exception the file must address.
- The fee is not rent and does not raise the coverage ratio.
- Recording creates a cloud on title, not a lien.
- Inflated contract rent used to fund rent credits may be measured against market rent.
- A tenant exercising the option is an exit event, so prepayment terms matter.
- Treatment varies by lender and file, so ask before you sign the option.
This article covers one specific reading of “option fee”: the fee a tenant-buyer pays under a lease option, where a memorandum of option may be recorded. Some states use the same phrase for a paid option period in a purchase contract, but that is a different animal and is not what recording and DSCR underwriting collide over.
DSCR Calculator
Run the numbers in your market
Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Oct 15, 2026
Prefilled with starting assumptions — enter your own rent or nightly figures, taxes, insurance, and HOA for a more accurate picture.
Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Oct 15, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Rent, nightly rate, occupancy, taxes, and insurance are editable estimates. Short-term rental figures are estimates only and vary significantly by season, property type, management approach, and local short-term-rental rules — confirm local regulations before relying on them. Qualifying income for short-term rentals varies by program — some use appraisal market rent, others use documented STR history or projections — and is confirmed in underwriting. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Key Terms Defined
- Option fee: A one-time, non-refundable payment from the tenant-buyer for the right to purchase the property later.
- Memorandum of option: A short document recorded in the public land records that gives notice of the tenant’s right to buy.
- Title exception: An item in the title report, such as a recorded option, that the policy does not insure over.
- Market rent: The rent an appraiser concludes the property would command from a typical tenant.
- Rent credit: A portion of monthly rent set aside to apply toward the purchase price if the tenant buys.
- PITIA: Principal, interest, taxes, insurance, and any association dues, the full monthly obligation on the loan.
What Is an Option Fee in a Lease Option?
An option fee is separate consideration paid for a right, not payment for occupancy. A lease option pairs an ordinary lease with a right to buy at a set price within a set period. According to Barnes Walker’s lease option glossary, the fee is non-refundable, separate from rent and the security deposit, and typically runs 1% to 5% of the purchase price. If the tenant walks away, the owner keeps it.
Wikipedia’s lease-option entry adds that a valid option generally needs valuable consideration from the tenant-buyer, and that even a token amount can qualify. So the fee can be large or nominal. It is negotiated, and a low-single-digit percentage of price is the usual shape.
The same entry draws a line investors often blur. A lease option binds only the seller to sell if the tenant chooses to buy. A lease-purchase binds both sides. A binding purchase obligation looks more like a pending sale than a rental, and that changes how a lender sees the property.
How Does Underwriting Treat the Fee, Step by Step?
The fee is outside the coverage math. DSCR compares rent to PITIA only. Lendmire arranges these loans through a network of select DSCR lenders, and across that network the rent used for lender review comes from the lease and the appraiser’s rent opinion, not from lump sums the owner has collected.
Here is how a file typically moves:
1. Document set. The lender asks for the lease, the option agreement, and the recorded memorandum if there is one. A clean option agreement states the price, the option period, the fee, whether rent credits apply, and the exercise deadline.
2. Title search. A recorded memorandum appears in the title work. Whether it is acceptable is a decision for the title company and the lender, and it varies by lender.
3. Income analysis. Rent used for lender review is the contractual monthly rent, or market rent if that is lower. The one-time fee does not enter the ratio. If monthly rent is padded to fund rent credits, expect the underwriter to compare it to the appraised market figure.
4. Exit and encumbrance review. The tenant’s right to buy works like a forced-sale clause, and the recorded memorandum makes it visible.
5. Prepayment review. If the tenant can buy while a prepayment penalty is running, the lender and borrower both need to know who absorbs that cost.
Most files we place carry a 1.00 coverage floor on select programs, with stronger ratios opening better pricing and leverage. A separate select-lender path takes coverage below 1.00 with leverage and terms adjusted. Neither path counts an option fee as rent. The ratio is rent over the full monthly obligation, and a lump sum received once is not a monthly figure.
One caution. Clearing 1.00 is not the same as positive cash flow. Repairs, vacancy, management, utilities, and capex all sit outside the calculation.
What Does Recording the Option Change?
Recording changes title, not income. A recorded memorandum puts the world on notice of the tenant’s interest. CREUniversity explains that this does not create a lien, only a cloud on the title. That distinction matters because lenders and title companies treat liens and clouds differently.
Nolo says recording protects the tenant by preventing the owner from selling to a third party while the option is active, and that some states require a memorandum of option to be recorded. Recording rules differ by state, so the local requirement is a question for the title company or an attorney.
For a DSCR borrower, three things follow. The exception will appear in the title commitment. The lender may ask that it be addressed before it funds a refinance, or may accept it with the option terms documented. And the same recorded notice that protects your tenant narrows what a new buyer or new lender can assume about the property.
Lien priority is the open question. Depending on recording order, a new first mortgage may sit senior to, or compete with, a recorded option. That is a title-law question and a good one for counsel before you close, not after.
Other liens are a separate matter. A mortgage recorded to secure an option is a lien, and DSCR lenders generally do not allow additional liens behind or beside their first position. A memorandum alone is not a lien.
How the Lender Reads Each Item
| Item | Touches coverage? | Touches title or eligibility? |
|---|---|---|
| Option fee | No, one-time payment | Documented, not insured |
| Rent credit | No, unless it inflates rent | Tied to option terms |
| Contract rent | Yes, if at or under market | No |
| Appraised market rent | Yes, caps rent used for program review | No |
| Recorded memorandum | No | Yes, title exception |
| Option purchase price | No | Yes, shapes the exit |
The pattern is simple. Money received once stays out of the ratio. Items that change who can claim the property get reviewed as title and exit issues.
Worked Example in Ratios
Run the numbers on a duplex where the contract rent is set above what the appraiser supports, because part of it feeds a rent credit. Say the lease rent produces a coverage ratio near 1.25x against PITIA. The appraiser’s market rent produces a ratio near 1.05x. The lender will generally use the lower figure, so the file qualifies at roughly 1.05x. These ratios are modeled assumptions, not market data.
The option fee does not appear in either number. It was paid once, it is not monthly, and it is not part of rent. If the same file had a market-rent ratio under 1.00x, the paths would be a select-lender sub-1.00 structure with leverage and terms adjusted, or a different rent basis. Qualification stays subject to lender guidelines, credit approval, and property review.
On leverage, most purchase files land at 75% to 80% LTV on an investment property, and cash-out refinances top out around 75% LTV on standard rentals. A larger down payment can lift the ratio, but it does not erase credit floors, reserve rules, or property eligibility. Credit floors begin at 620 in parts of the network, most programs want around 660, and 700 and above unlocks the strongest leverage tiers. Reserves commonly run about 6 months of PITIA, stepping up to about 9 months on loans above $1,500,000, and vary by lender and transaction.
When the Tenant Exercises, Is That an Exit?
Yes, and it is the part forum discussion keeps circling. A tenant buying the property pays off the loan, which is an exit event. If that happens inside a prepayment penalty window, someone owes the penalty. The cleanest approach is to align the option period with the penalty term, or to write in who bears that cost, before the option is signed.
Some practitioners report that certain DSCR lenders resist leases containing purchase options at all. That varies across the network, which is the reason to ask before signing rather than after. Our experience is that the files that go smoothly disclose the option up front and hand over complete documents.
If the tenant becomes an owner-occupant at exercise, the exit is a sale to a primary-residence buyer. That buyer’s financing is their own matter, not a feature of your loan.
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
- Lease-purchase, not option. When both sides are bound to close, the property looks like a pending sale. Expect a harder conversation and possibly a different product.
- Disguised sale. JMCO notes the IRS looks at economic substance. Rent far above market, a low option price, and rent applied to the price are the warning signs, and they are the same signs an underwriter reads as inflated rent.
- Foreclosure exposure. A recorded memorandum protects the tenant against later sales, but the option fee can still be lost in a foreclosure, per HonestCasa.
- Recorded security instrument. A mortgage or deed of trust securing the option is a lien, and most lenders treat it very differently from a memorandum.
- Ineligible property. Manufactured homes, log homes, and barndominiums are not offered in the network’s DSCR programs, however the option is structured.
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.
Common Misconceptions
- Recording creates a lien. It does not. It creates a cloud on title.
- The option fee counts as rent. It is separate consideration for the right to buy.
- Rent credits always reduce cash to close. Banks typically credit only amounts above market rent, per Wikipedia’s lease-option entry.
- A strong ratio overrides the option. A high coverage number does not remove a title exception or an exit question.
- Every DSCR lender treats this the same way. Treatment varies by lender and file.
What Should the Investor Do in Practice?
Sequence matters more than anything else here. Before you sign an option on a property you plan to finance or refinance:
1. Ask the broker whether any lender in the network would take a lease containing a purchase option, and under what terms.
2. Order a title commitment and see how the recorded memorandum appears.
3. Keep contract rent at or near market so the coverage ratio is not discounted.
4. Match the option period to the prepayment window, or document who pays if the tenant buys early.
5. Bring in counsel on recording rules and lien priority in your state.
The honest tradeoff is simple. A purchase option can attract a motivated tenant and pay a fee up front, but it narrows lender choice and complicates refinance and sale. If your plan is a long hold with a clean refinance later, a plain lease is the simpler path. If the option is central to the deal, structure around the lender’s view from the start. The complete DSCR loans guide covers the baseline mechanics.
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.
Frequently Asked Questions
Does the option fee help me qualify for a DSCR loan?
No. The fee is a one-time payment, and the coverage test uses monthly rent over PITIA. It may help your cash position, which matters for reserves, but it does not move the ratio.
Do I have to record the option?
It depends on the state and on what the parties want. Some states require a recorded memorandum, and recording protects the tenant by blocking a sale to a third party. For you as owner, recording means a title exception that a lender will see.
Will a recorded memorandum stop a refinance?
Not automatically. It shows up as a title exception, and lenders and title companies decide whether to accept it, require a release, or require terms documented. Acceptance varies by lender, and lien priority is a question for counsel.
Which rent does the lender use if my contract rent is above market?
Generally the lower of contract rent and appraised market rent. If rent is inflated to fund rent credits, the market figure is the safer planning number.
What happens if the tenant buys during a prepayment penalty period?
The payoff is an early exit, so the penalty can apply. Aligning the option period with the penalty window, or agreeing in writing who pays, avoids the surprise.
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.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Barnes Walker lease option glossary
3. CREUniversity lease option tips
4. Nolo option-to-purchase terms
5. JMCO lease option tax treatment
6. HonestCasa
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 Raise a Thin DSCR Before the Lender Runs the Numbers · Does a DSCR Loan Change When the Lender Sells It or Shuts Down? · How a Portfolio DSCR Lender Treats a Package Bought This Year
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.