The Quick Read: Usually not while the option is still live, because a recorded option is a visible encumbrance on title, and the lender still needs a clean, insurable first lien before it will fund, so the realistic paths are a recorded release, a subordination or consent from the option holder, or rare lender acceptance. A DSCR loan is reviewed primarily on property-level rental income covering the payment, subject to lender guidelines. That test does not waive the title requirement.
- The title commitment lists the option as an exception or a requirement, whatever the loan type.
- Strong rent coverage does not offset a title problem.
- The cleanest fix is a recorded release or termination signed by the option holder.
- On a refinance, the owner has to obtain the release. On a purchase, the seller can often deliver it at closing.
- Order the title search before the appraisal and rent schedule, so the option surfaces first.
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 rent-to-payment test is the part that differs. The lien still has to be insurable, and that is where a recorded option causes trouble. For the full picture of how these loans work, see the complete DSCR loans guide.
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Why Does a Recorded Option Stop a DSCR File?
A recorded option shows up in the title commitment as an exception, and a lender’s title policy exists to protect lien priority. If the policy will not insure over the option, the lender cannot confirm its mortgage ranks ahead of, or survives, the option holder’s rights.
An older title-industry underwriting manual on options to purchase says an option to purchase the insured property, recorded or unrecorded, must be shown as an exception in Schedule B of the commitment and policy. The manual is dated, so treat it as background on how title underwriters think. The logic still holds. An exception means the policy does not cover that item.
Real Estate Skills defines a cloud on title as any recorded document, claim, or lien that puts ownership in question. A recorded option or memorandum of option fits that definition. It does not create a lien, but it does cloud the record.
That is why the file stalls at title, not at coverage. The rent schedule can be strong, and the credit can be strong. A lender that cannot get a clean loan policy still has no loan.
How the Option Appears in Title Work
The title search finds every mortgage, lien, judgment, and encumbrance on the property, as a title-service explainer notes about refinances in general. A recorded option or memorandum of option appears in the commitment, usually in Schedule B. It may show as an exception, as a requirement to be satisfied before closing, or both.
Four questions drive what happens next:
1. What instrument holds the option? The same underwriting manual lists several places an option can sit: a standalone option, a lease, a mortgage, a will, or a deed with a right of repurchase. Each is handled differently.
2. Is the option still live? The manual lists factors for treating an option as an exception: whether it has been exercised, extended, or renewed, and whether the optionee is in possession.
3. Who holds it? A tenant, a prior seller, an affiliate, and a stranger who recorded a memorandum are four different problems.
4. Does it rank ahead of the new mortgage? That is a question for the title officer and counsel, not for the loan file.
Once the commitment lists the option, the lender’s underwriter or counsel reads it. They decide whether the exception is acceptable, needs curing, or kills the file. No published guideline spells out a single rule for every lender, so the answer comes from the specific title company and the specific lender.
Who Are You in This Deal?
Your position changes the fix. Find your row first.
| Your position | Typical problem | First move |
|---|---|---|
| Owner refinancing | Option still on record | Get a release or termination |
| Buyer of the property | Seller’s option on title | Make release a closing condition |
| Tenant with an option | Wants to buy with DSCR | Close before the option lapses |
| Prior seller or affiliate | Stale memorandum left behind | Record a release |
Option Types and What a Lender Cares About
Not every option is the same risk. The table shows how the common types usually read to a title officer and underwriter.
| Option type | Usually recorded? | Lender concern |
|---|---|---|
| Tenant lease option | Often by memorandum | Priority and possession |
| Third-party option | Sometimes | Clouds title, may rank first |
| Right of first refusal | Sometimes | Can disrupt a sale |
| Seller buyback | Often in deed | Defeats ownership |
| Affiliate or partner option | Varies | Related party, name match |
An option written into a lease is the scenario investors meet most. The manual treats options inside leases differently from options in gross, and says options in gross are uninsurable unless state law treats them as an interest in real estate. An agency title guide on options to purchase adds that when insuring under two policies, an exception must be made in Schedule B of the owner’s policy for the option provision in a recorded lease.
Recorded vs. Unrecorded: Neither Is a Safe Workaround
Many investors assume only a recorded option matters. That is wrong. The underwriting manual says recorded or unrecorded options must be excepted when they are known. A lease that contains an option clause discloses it, whether or not anyone recorded a memorandum.
Practitioners also disagree about how much a recorded memorandum protects the option holder. On one BiggerPockets investor thread, investors argue over whether title companies honor such memoranda or work around them, and the answer varies by jurisdiction. That debate matters to the optionee. For an owner trying to refinance, the safe assumption is simpler: if it is on the record or in the lease, plan to cure it.
An expired option does not clear itself either. A release or termination is normally recorded to remove it. Skipping that step leaves a stale document on title that the next buyer or lender will find.
Why Lenders React Differently
Opinions vary across the wholesale network. Some programs will not take a property with an option on title at all. Others will look at it if the option is out of the way or subordinated. A few will review a lease-option situation case by case. No program overrides the title requirement.
Three things drive the differences:
- Title company comfort. The lender’s title insurer has to agree to insure the first lien. If the insurer will not, the lender usually will not move forward.
- Exit risk. A purchase option can force a sale during the loan term. That affects the lender’s view of the payoff and any prepayment terms.
- Due-on-sale exposure. A lease-option practitioner guide warns that when an option is recorded, an existing lender may elect to enforce its due-on-sale clause. That matters if a refinance is meant to pay off a loan that already carries one.
Large banks tend to be the least flexible here. Non-QM lenders in a wholesale network have more room, but the title rule is the same. Lendmire, as a broker, can only place a file that a lender and its title insurer will accept.
Cure Paths and Who Signs What
Most recorded options end in one of five ways. The table shows who prepares and who must consent.
| Cure path | Who signs | Notes |
|---|---|---|
| Release or termination | Option holder | Notarized, then recorded |
| Subordination | Option holder | Lender must accept it |
| Expiry with recorded proof | Owner | Only if no extension |
| Quiet-title or court order | Court | If holder won’t sign |
| Switch to a different lender | Owner | Same title issue remains |
The release is the most common fix. An attorney prepares a release or notice of termination, the option holder signs it before a notary, and it is recorded. The brokerage does not draft these documents. An attorney or the title company does.
If the option holder will not sign, the owner may need a quiet-title action. That is slower and costlier, and it is a legal decision, not a loan decision. A stale or unauthorized memorandum, such as one a wholesaler recorded without a valid contract, is a common reason files stall. Filing without a valid contract can bring slander-of-title claims.
If the option holder is also the tenant, the lender may want a consent or subordination from that tenant. Commercial lenders routinely ask for recordable subordination, non-disturbance, and attornment agreements from tenants named in recorded memoranda of lease, and a similar request can reasonably apply to an optionee. Treat that as practice from commercial files, not a published DSCR rule.
A Worked Example
Say an owner holds a rental with a tenant who was given a purchase option in the lease. A memorandum of that option was recorded years ago. The owner wants a cash-out refinance on the investment property at 75% LTV, and the rent covers the full payment at roughly 1.2x. On paper, the coverage clears 1.00 comfortably. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
The title commitment comes back. The memorandum sits in Schedule B. The title officer says it must be released or the tenant must subordinate. The owner has three choices:
1. Ask the tenant to sign a release, which makes sense if the option has expired or the tenant agrees to drop it.
2. Ask the tenant to sign a subordination, so the new mortgage ranks first.
3. Wait until the option runs out, record proof of expiration, and then reapply.
If the tenant refuses, the owner may be looking at a quiet-title action. The coverage ratio never mattered to the outcome. The rent figure, the appraisal rent schedule, and the payment were fine. Title was the whole story.
Note also that clearing 1.00 is a rent-to-payment test only. It does not mean the property cash flows after repairs, vacancy, management, utilities, and capex.
Purchase, Refinance, and Cash-Out Differ
On a purchase, the seller can often deliver a release as a title requirement at closing. The buyer’s contract should make that release a condition. If it cannot be delivered, the buyer can walk or renegotiate.
On a refinance, the borrower already owns the property and has to obtain the release. There is no seller to lean on. On a cash-out, the same applies, and the cash-out ceiling on standard rentals is around 75% LTV across most of the network. Seasoning of about 6 months is the common expectation, counted from the recorded deed. Any title cleanup or re-vesting should be planned so it does not disrupt that clock. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Purchase leverage on investment properties usually lands at 75%-80% LTV, with select high-leverage programs reaching 85% for borrowers around 700+ credit. Most programs want around a 660 score, and a 620 floor exists in parts of the network. Reserves commonly run around 6 months of PITIA, stepping up to about 9 months on loans above $1,500,000. Standard programs go up to $3,000,000. These are typical ranges from select lenders in the network, subject to lender guidelines. Some programs go below 1.00 coverage with leverage and terms adjusted, but no lender waives title to get there.
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 Doesn’t Fix the Problem
- An LLC. Vesting in an entity does not remove a recorded encumbrance. Entity ownership affects borrower eligibility, subject to lender program eligibility, not title exceptions. Lendmire’s piece DSCR vs Bank Statement Loan When a Trust or LLC Holds the Title covers the entity side.
- A bigger down payment. More equity can lift the coverage ratio. It does not erase leverage caps, credit floors, reserve rules, or title requirements.
- Rent strength. Coverage clears the income test. It does not touch the title test.
Checklist Before You Apply
1. Pull the county record and look for any option, memorandum, or lease with option language.
2. Ask the title officer how the option will read in Schedule B.
3. Identify who holds it and whether it has been exercised, extended, or renewed.
4. Decide on the cure path and get an attorney to prepare the document.
5. Match the names across title, lease, insurance, and mortgage statement.
6. Then order the appraisal and rent schedule.
Tax treatment varies, so consult a qualified professional before relying on any tax assumption tied to a cure or restructure.
Key Terms Defined
Option to purchase: A right to buy the property at a set price, within a set time, that the owner cannot cancel on their own.
Memorandum of option: A short recorded document that gives public notice that an option exists.
Cloud on title: Any recorded claim or document that puts ownership in question.
Schedule B exception: A listed item that the title policy does not insure over.
Release or termination of option: A signed, notarized, recorded document that ends the option holder’s rights on the record.
Subordination: An agreement that puts the option holder’s rights behind the new mortgage.
Due-on-sale clause: A loan term that lets a lender demand payoff if the property interest transfers.
Frequently Asked Questions
Does recording the option kill a DSCR deal?
Not always, but it stops the file until title is resolved. A release, termination, or subordination can clear it. Without one of those, most lenders will not close, because their title insurer will not insure the first lien cleanly.
Can the option be removed?
Yes, in most cases. The option holder signs a notarized release or termination, and it is recorded. If the holder refuses, the owner may need a court order or quiet-title action. An attorney should guide that route.
Does an unrecorded option avoid the problem?
No. Known options are excepted whether or not they were recorded, and a lease that contains option language discloses it. Assume the lender will see it.
Can a tenant with a purchase option still get a DSCR refinance on the property?
It depends on the lender and the title company. Some programs decline lease-option properties outright. Others review the file if the option is subordinated or released. Plan on getting consent from the tenant before the file goes in.
Does a bigger down payment or higher rent help?
Not with title. Equity and rent coverage help clear leverage and ratio tests. They do not remove a recorded exception, so the option still has to be cured.
If You Are Buying or Refinancing a Rental
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 that arranges DSCR financing through select lenders in its wholesale network across 41 markets, including Washington, D.C. Call 828-256-2183 or request a quote. Qualification is subject to lender guidelines, credit approval, and property review. This is not a commitment to lend.
An option on the record is easier to cure before the loan application than after the appraisal has been paid for.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
A non-QM mortgage broker (NMLS# 2371349), Lendmire arranges DSCR financing for real estate investors in 41 markets — 40 states plus Washington, D.C. Because deals are underwritten primarily on property cash flow rather than personal income documentation, the structure suits self-employed buyers and entity-owned portfolios. Lendmire places loans through wholesale investor lenders; it is not a direct lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Title underwriting manual on options to purchase
2. Real Estate Skills on cloud on title
3. Easy Title Search on refinancing with a lien
4. Agents Title options to purchase underwriting guidelines
5. BiggerPockets thread on memoranda of agreement
6. Cheri Elliott on lease option risks
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 Protect a DSCR Loan File With a Backup Lender · How to Shop and Document Rental Insurance Before a DSCR Loan · How to Document a Below-Market Lease for a DSCR Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.