The Quick Read: When a tenant pays less than the property would rent for today, most programs count the lower of the two numbers, so the signed lease usually sets the rent used in the coverage ratio, and a below-market lease pulls the ratio down. That is a program convention, not a law, and it varies by lender. The appraiser’s market-rent opinion still matters, because it is the ceiling and the fallback.
- The lender compares the signed lease to the appraiser’s market rent and typically uses the lower figure.
- A lower rent used for lender review can mean a smaller loan, a different pricing tier, or more cash down, not only a yes or no.
- Above-market leases are capped at market, so extra rent is real income that the ratio does not credit.
- On multi-unit buildings the test usually runs unit by unit, so one legacy lease can drag the whole building down.
- The best fixes happen before the appraisal is ordered: borrow less, renew at market, or buy the unit vacant.
Picture a duplex with a long-time tenant on a lease signed when rents were lower. The unit would clear coverage easily at today’s rents. On paper, it doesn’t. That gap is what this article explains.
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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.
What “Below Market” Means to an Underwriter
Two rent numbers sit on every leased file. In-place rent is what the tenant actually pays under the signed lease. Market rent is the appraiser’s opinion of what the unit would rent for today. A lease is below market when the first number is smaller than the second.
The market figure comes from a standard form. For a single-family home, the appraiser completes a rent schedule (Form 1007). For a two-to-four-unit building, the matching form is Form 1025. It uses three comparable rentals. It adjusts only where a comp differs significantly from the subject. It reconciles everything to one indicated monthly rent.
Those forms were built for agency loans. DSCR loans are a different product. Still, the format is so familiar that DSCR lenders borrow it. Fannie Mae’s appraiser update describes the same form as documenting the appraiser’s estimate of monthly market rent for a single-family investment property. The form’s use in DSCR lending is a borrowed habit. It is not a federal requirement.
How Underwriting Handles It, Step by Step
The short rule: the lender uses the lower of the lease and the market rent. Here is how a file gets there.
1. Documents come in. You provide the executed lease and proof that the rent is actually being paid. On a two-to-four-unit property, expect a rent roll too.
2. The appraisal includes a rent opinion. The appraiser attaches Form 1007 or Form 1025 to the appraisal.
3. The appraiser builds market rent. Comparable rentals are selected, adjusted only for significant differences, and reconciled into one number.
4. The underwriter compares the two figures. Below-market lease: the lease rent counts. Above-market lease: rent is capped at market. Vacant unit: only the market rent exists, so that is what counts.
5. The ratio is calculated. The chosen rent is divided by the full housing payment on the new loan: principal, interest, taxes, insurance, and any HOA dues, which together are called PITIA. On a refinance or cash-out, that is the new, larger payment.
6. The result sets the terms. The ratio feeds eligibility, pricing tier, and the maximum loan size. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Step 6 is where investors get surprised. Nothing about you changed. Your credit, reserves, and experience are identical. But a lower rent used for lender review changes what the property can support.
The whole process turns on a few things:
- Which program the file goes to, and whether it is a purchase or refinance.
- How wide the gap is between lease and market rent.
- Whether the lease is fixed-term, month-to-month, or expired.
- How well the appraiser’s comps fit the property.
- Whether payment of the rent is documented.
- Whether the rent is regulated or subsidized.
Why Lenders Count the Lower Number
The lender is underwriting the property’s income. It wants a rent figure that is both real and repeatable. A lease above market is real today, but a new tenant probably wouldn’t pay it, so the lender caps it. A lease below market is also real today. The lender has no signed paper showing the higher rent exists.
Commentary on lease normalization from MMCG Invest makes the same point from the commercial side. A below-market lease signals future upside, because rents could rise. It also means current income, and the coverage ratio, is lower.
Upside counts for something in your own plan. In most residential DSCR files, though, upside you haven’t captured doesn’t count toward the ratio. Hope is not a rent roll.
Lease Situation by Lease Situation
This table shows what typically counts. Programs vary, so treat it as the common pattern across the network of DSCR lenders Lendmire works with.
| Situation | Rent that typically counts | What to document |
|---|---|---|
| Lease below market | The lease | Lease, proof of payment |
| Lease at market | Either (they match) | Lease, proof of payment |
| Lease above market | Market rent (capped) | Lease, appraiser’s rent figure |
| Vacant | Market rent | Appraiser’s rent figure |
| Month-to-month | Varies; often market or lease | Agreement, payment history |
| Expired lease | Varies by program | Renewal or holdover terms |
| Related-party tenant | Extra scrutiny; lease often governs | Lease, bank deposits |
| Mixed multi-unit | Applied unit by unit | Rent roll, each lease |
Some programs lean toward market rent when the unit is vacant or the tenant is month-to-month. Others stick with actual rent. A purchase and a refinance can also be treated differently, because a refinance with a long-term tenant is the cleanest case for using the lease. Don’t assume. Ask the lender how the program handles your exact situation before you sign anything.
A Worked Example, Three Ways
Run the numbers on one modeled property. These are illustrative ratios, not market data. The loan terms are identical in all three cases, and only the rent changes.
- Under the in-place lease: coverage lands around 0.90x. Rent doesn’t fully cover the monthly obligation.
- At the appraiser’s market rent: coverage lands around 1.10x. The same property clears the benchmark many programs use.
- After a renewal at market: coverage returns to roughly 1.10x, because the new lease now matches the market figure.
Same building, same loan, same borrower. The only variable was the rent on the signed lease.
Now the decision. At 0.90x, many standard programs won’t be a fit as structured. 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Which path makes sense depends on the borrower, the property, and the lender’s review. None of it is guaranteed.
The same file at 1.10x opens more programs and often better terms. Stronger ratios generally open better pricing and leverage tiers, subject to lender guidelines. Honestly, this one is close to a toss-up for many investors: renew first and apply later, or apply now and accept a smaller loan or more cash down. The answer depends on whether the tenant will agree to a renewal and how much the delay costs you.
The Gap Changes Loan Size, Not Just Approval
Investors tend to picture a binary outcome, approved or denied. The more common result is a resized loan. A lower rent used for lender review supports a smaller payment, which means a smaller loan or more cash at closing. MMCG’s commentary says the same about normalized rents: they can force a lower loan amount to hit minimum coverage.
Equity helps, but only up to a point. A larger down payment lowers the monthly obligation and can lift the ratio. It never erases leverage caps, credit floors, reserve rules, or property eligibility. Across the network, most purchase files land at 75% to 80% loan-to-value (LTV) on an investment property, meaning 20% to 25% down. LTV is simply the loan balance as a percentage of the property’s value. Select high-leverage programs reach 85% LTV on a purchase with roughly a 700-plus score. On a cash-out refinance of a standard rental, the ceiling is about 75% LTV, with around six months of seasoning, meaning ownership time, as the common expectation. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
The strongest files clear two tests: enough equity and enough rental coverage. A below-market lease attacks the second one.
Multi-Unit Buildings: One Old Lease Can Sink the Math
On a two-to-four-unit property, the lower-of test generally runs unit by unit. An above-market unit doesn’t offset a below-market unit next door. Each unit gets the lesser of its own lease and its own market rent.
Take a fourplex with three units at market and one unit under a decade-old lease. The building’s average looks fine. The underwriter’s number is the sum of the per-unit lower figures, which is less than the average. Then the Form 1025 market figures are checked against the leases for each unit.
Vacant units in a mixed building simply take the appraiser’s market figure. If one unit is empty and three are leased, the empty unit may help your ratio if the leased ones are below market. That is a quirk worth knowing, not a strategy to chase.
How the Lender Verifies the Lease
A lease alone is a promise. Lenders want evidence the rent actually moves. Typical proof is a signed lease, a payment history, and bank deposits that match the stated amount. If deposits don’t match the lease, the file stalls until the difference is explained.
Some tenants deserve extra attention. Related-party tenants, cash payments, and brand-new leases draw added scrutiny and proof-of-payment requirements. This is where backdated or conveniently timed leases cause trouble. A lease must reflect a real agreement. A rent set well above market, with offsetting credits tucked into a side contract, is a risky tactic. Don’t do it.
Short-term rentals sit in a different lane. They are underwritten on hosting history and income, not a long-term lease, so the lower-of lease rule doesn’t map cleanly.
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 You Can Actually Do About It
You can’t set the appraiser’s number. You can give the appraiser good information, such as comps and feature details that support market rent. You can also control things on your side, most of them before the appraisal is ordered.
- Borrow less. The simplest fix. A smaller loan means a smaller payment against the same rent. A bigger down payment lifts coverage without touching the lease.
- Renew at market before the appraisal. With the tenant’s agreement and clean documentation, a lease that matches market removes the gap. Check any local rent rules that limit increases.
- Buy vacant. The appraisal sets the rent, with no legacy lease in the way.
- Pick a program that weighs actual rent differently. Across the network, programs differ in how they treat leases and market rent. A lender that treats your situation favorably may exist, but that is a search, not a given.
- Use a sub-1.00 path if the numbers justify it. Available through select lenders in the network, with leverage and terms adjusted. The tradeoff is real.
- Ask before signing a discounted lease. A discount to a friendly tenant follows the file straight into the ratio. A lender conversation costs nothing. Renegotiating later can.
Lendmire’s piece How to Qualify for a DSCR Loan When Your Lease Is Below Market Rent walks through the file-prep side. If the loan is large, a jumbo DSCR lender may use either the lease or market rent, and that choice can change how a below-market lease affects the file.
Timing is the thing to remember. Lease terms and renewal dates are controllable before the appraisal. After the report comes back, you are negotiating with a number someone else wrote.
Where the General Rule Breaks
The lower-of rule is the common convention. It isn’t universal. Here are the named edge cases.
- Purchase versus refinance. Some programs are more willing to substitute market rent on a purchase of a vacant or month-to-month unit. They rarely do so on a refinance with a long-term tenant. This varies by program.
- Subsidized or regulated rent. Rent below market because of a rent-control limit or a subsidy contract generally doesn’t get a market-rent substitution. Expect the regulated or contract figure to govern.
- No-ratio structures. Available only through select lenders, generally for borrowers who already own a primary residence. They work differently, with pricing and leverage that reflect it.
- Ineligible properties. Manufactured homes (single- and double-wide), log homes, and barndominiums are not offered in the network’s DSCR programs, so the lease question never arises for them.
A final warning on the mirror image. Clearing the ratio doesn’t mean the property makes money. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation. A property can pass coverage and still lose money each month.
Key Terms Defined
DSCR (debt service coverage ratio): the qualifying monthly rent divided by the full monthly housing payment on the loan.
PITIA: principal, interest, taxes, insurance, and any HOA dues, which together make up the payment the rent must cover.
In-place rent: the rent the tenant actually pays under the signed lease.
Market rent: the appraiser’s opinion of what the unit would rent for today, reconciled from comparable rentals.
Lower-of rule: the common convention that the lender uses the smaller of the lease rent and the market rent.
Seasoning: the ownership period a lender expects before it will refinance or cash out.
Rent roll: a list of each unit, its tenant, its lease terms, and its rent.
Frequently Asked Questions
Does a lower lease reduce my DSCR?
Usually, yes. On most programs the lease governs when it is below market, so the ratio shrinks along with the rent. The size of the drop depends on the gap and the loan terms. A smaller loan or a higher-equity purchase can offset it.
Can I use market rent instead of the lease?
On most programs you can’t, but a few treat vacant or month-to-month units differently. The appraiser’s market figure matters most when the unit is vacant. Ask the lender how the program handles your tenant before you make an offer.
Does a month-to-month tenant change the answer?
It can, because some programs fall back on market rent when no stabilized lease exists, while others use the actual payment. Either way, expect to document that the rent is actually paid.
Can I dispute the appraiser’s rent figure?
You can supply comps and feature details that help the appraiser, but you can’t set the number. If you think a comp was wrong, raise it early with the lender, before the report is final.
Is passing the ratio the same as positive cash flow?
No. The ratio compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses are outside it, so a property can clear coverage and still run at a loss. 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.
Next Steps
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire, a mortgage broker arranging DSCR financing through select lenders in its wholesale network across 41 markets, including Washington, D.C., can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. For the full picture, start with the complete DSCR loans guide. Program terms change, and every file is reviewed individually, so none of this is a commitment to lend.
A below-market lease is a pricing signal about timing: the rent you can renew before the appraisal is the rent the ratio will reward.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
Lendmire, NMLS# 2371349, is a non-QM mortgage broker serving real estate investors in 41 markets, including Washington, D.C., through DSCR investor loan programs. Qualification is generally reviewed around the subject property’s rental income, not the borrower’s W-2 history — a practical fit for LLC-titled portfolios and self-employed investors. All scenarios remain subject to lender review and program guidelines. Two consecutive Scotsman Guide Top Mortgage Workplace recognitions (2025, 2026).
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References
1. Fannie Mae Appraiser Update
2. MMCG Invest, Market Rent vs. Contract Rent
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Lease Rent vs. 1007 Market Rent for a BRRRR DSCR Takeout · How Much Cash-Out a DSCR Lender Releases on a Paid-Off Rental · Interest-Only DSCR Loan vs. 1099-Only Loan
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.