The Quick Read: It depends on the program and on where the relative lives. A relative who runs a separate household in a separate property is usually a tenant question, while a relative who lives in the borrower’s household is an occupancy problem that most business-purpose loans do not allow. Hard money is short-term, asset-based financing, and the family-tenant issue usually gets decided again on the long-term rental loan that takes it out.
- Family living in your household is owner occupancy, and business-purpose loans are not built for it.
- A relative in a separate household may be allowed, but only if the lease reads as arm’s-length.
- Disclose the relationship at application. The signed affidavit is the basis of the file.
- A discounted family lease shrinks the rent a lender counts and can push coverage under 1.00.
- Plan the long-term takeout loan before you sign the lease, because it may treat the tenant differently.
Most searchers use “hard money” loosely. Strictly, it is a short-term, interest-only loan secured by the property, often used to buy and rehab. The family-tenant condition rarely lives in the hard money note itself. It lives in the occupancy affidavit and in the DSCR refinance that follows. This article covers both phases.
What this loan actually costs to carry.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: 85% with fewer than 2, 90% with 2 or more, 93% with 5 or more completed projects — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
What Does a Hard Money Lender Look At on a Rental?
A hard money lender underwrites the asset, the plan, and the exit. Credit and income matter less than they would on a bank loan, but they are not ignored.
Across the programs Lendmire works with, the typical conditions look like this, always varying by lender, property, and experience:
- Collateral: non-owner-occupied residential property, 1-4 units. Ground-up construction can go to 10 units.
- Leverage: fix-and-flip loans run up to 93% of project cost for borrowers with 5+ completed projects, 90% of project cost at 2+, and 85% with fewer than 2. Every tier is capped at 75% of after-repair value. Bridge purchases without rehab go up to 80% of purchase price. Cash-out and rate/term refinances go up to 65% of value.
- Rehab funds: up to 100% of the rehab budget is released in draws against completed work. That is a budget figure, not a purchase LTV.
- Credit: a 620 minimum score, with added conditions below 660.
- Terms: 6-18 months, interest-only, no prepayment penalty.
- Loan size: up to $5,000,000, larger by exception.
Nothing here is a commitment to lend, and each file is reviewed on its own. The tenant shows up in this list indirectly. A rented, stabilized property is the exit most lenders want to see.
Key Terms Defined
Hard money loan: a short-term, interest-only, asset-based loan secured by real property, used for purchases, rehabs, and bridge situations.
Occupancy: who lives in the property. On an investor loan, the borrower and the borrower’s household may not.
Related-party tenant: a renter with a family or ownership link to the borrower.
Arm’s-length lease: a lease on terms two unrelated parties would accept, at market rent, with real payment.
Takeout loan: the long-term loan, often a DSCR rental loan, that pays off the hard money note after the property is stabilized.
DSCR: monthly rent divided by the full monthly obligation: principal, interest, taxes, insurance, and association dues.
Who Can Live in or Rent the Property?
The household test comes first. If the relative lives in your household, the property is owner-occupied for practical purposes, and the loan does not fit.
| Who is in the property | Typical treatment |
|---|---|
| Borrower | Not allowed on a business-purpose loan |
| Relative in the borrower’s household | Treated as owner occupancy |
| Relative with a separate household | Program-dependent; needs a credible lease |
| Unrelated tenant at market rent | Standard case |
| Vacant during rehab | Normal for hard money |
The business-purpose and occupancy affidavit is where family enters the file. Sample non-QM affidavit forms say neither the borrower nor any family member intends or expects to occupy the property. Some forms extend that to members and owners of a borrowing entity and their families. These are forms, not guidelines, and they vary. What matters is that you sign one, and a false statement can carry real consequences, including acceleration of the loan.
“Family” has no single lender definition. Household is the more precise concept. A parent in a separate apartment across town is a different file from a parent sleeping in your spare room. Expect lenders to ask, and tell them first.
An LLC does not fix this. Holding title in an entity does not turn a related tenant into an unrelated one, and some programs bar any LLC member from occupying. Entity eligibility is subject to lender program guidelines.
Hard Money Phase vs. Refinance Phase
The two phases treat a family tenant differently, and that gap is where files get hurt.
| Factor | Hard money phase | DSCR takeout phase |
|---|---|---|
| Main question | Asset, plan, exit | Does rent cover the payment |
| Tenant matters because | It supports the exit story | It sets the rent counted |
| Family lease | Often tolerated if disclosed | Program may exclude or restrict it |
| Rent counted | Rarely the driver | Lower of lease or market rent |
A hard money lender may care little about who rents during a short interest-only term. The long-term lender cares a great deal. A related-party tenancy in place at the bridge stage carries into the refinance. A lease signed right before the refinance may draw questions about why it appeared then.
So the rule is simple. Read the takeout program’s related-party rule before you sign the family lease, not after.
How Underwriting Treats the Family Lease, Step by Step
Practitioners see three program postures. A strict overlay excludes related-party leases. A moderate one allows them with market rent and payment proof. An occupancy-only rule bars family from living there but is silent on a separate-household tenant. Here is how a file moves.
1. Check program eligibility first. Know which posture applies before you build any paperwork.
2. Apply the occupancy test. Does the relative live in your household? If yes, stop. If they run their own household, move on.
3. Disclose at application. An undisclosed relationship found late damages the file. The affidavit is the basis for the loan.
4. Set the rent used. The common convention is that the lender counts the lower of the signed lease rent and the appraiser’s market rent. The appraisal rent schedule is typically Form 1007 on a single-family home and Form 1025 on a 2-4 unit building. Lease rent above market earns nothing extra.
5. Run the coverage ratio. DSCR is the accepted rent over the full monthly obligation. A discounted lease shrinks the top number and can drop the ratio under 1.00.
6. Assemble the proof package. Provide a signed fixed-term lease, bank-statement deposits from the tenant’s own account, a security deposit record, and market-rent support. A clean trail helps. It does not guarantee the rent counts as written.
Clearing 1.00 is also not the same as positive cash flow. DSCR compares rent to the payment only. Repairs, vacancy, management, and utilities sit outside it.
Where Does the “Arm’s-Length” Standard Come From?
Lenders borrow the language from foreclosure law. The Federal Reserve’s supervisory letter CA 18-4 describes a bona fide lease under the Protecting Tenants at Foreclosure Act. Three things must hold: the tenant is not the mortgagor or the mortgagor’s parent, spouse, or child; the lease is an arm’s-length transaction; and the rent is not substantially below fair market rent unless a subsidy reduces it. Nolo’s overview of tenant protections after foreclosure explains the same test and the 90-day notice that bona fide tenants receive.
That law governs what happens to tenants after a foreclosure. It is not an underwriting rule. Lenders use the same logic for a practical reason. A family lease is harder to defend as arm’s-length, so the collateral is harder to market if something goes wrong. That is lender reasoning, not a published industry rule.
How to Set and Document a Family Lease
Treat the relative like any other tenant, because the file will be read that way.
- Price the lease at market. A discount lowers the rent counted and invites questions.
- Use a signed, fixed-term lease, not a handshake.
- Have the tenant pay from their own bank account, on schedule, every month.
- Hold and record a security deposit.
- Keep the appraiser’s rent figure and any market-rent support in the file.
- Disclose the relationship in writing at application.
Here is a worked example with modeled assumptions, not market data. Say a property’s full monthly obligation is covered 1.25x by market rent. A relative signs at a meaningful discount, and the lender counts the lower lease figure. Coverage can slip toward 1.00 or below. At that point the file may need less leverage or more equity. Some select lenders in the network will review coverage below 1.00 with leverage and terms adjusted, but that is a different path with different terms, not a softer version of the same one.
A larger down payment lowers the payment and can lift the ratio. It never erases an occupancy rule or a related-party restriction. The strongest files clear both tests: enough equity and enough rental coverage.
Edge Cases Where the General Rule Breaks
- Parent or child living with you. That is owner occupancy, not a lease question.
- Life estate for a parent. If the parent lives there, there is usually no arm’s-length lease and no rent to count.
- Separated spouse or children staying in the property. Treat it as occupancy by the borrower’s household.
- Relative’s business as master tenant, rent-by-room, boarders. These must look arm’s-length, and several program types reject boarder-only setups.
- 2-4 unit buildings. The owner cannot occupy a unit. A relative in one unit is a related-party tenant question.
- Blanket or portfolio loans. One weak tenant situation can touch the whole note. Keep family leases off a bundled file where possible.
- Rent-assisted relative. This needs a lease, voucher contract, and payment ledger, a different documentation set.
- Lease started just before the refinance. Expect questions about timing and rent.
Short-term-rental structures add another layer. 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.
If the Relative Is Your Only Tenant
You have four realistic options.
1. Find an unrelated tenant before the refinance. This is the cleanest path.
2. Pick a program that allows related-party leases with market rent and payment proof, and confirm that before you contract.
3. Time the move-in after payoff. If the relative is not part of the file when the takeout closes, the question changes. Make sure the timing is honest and disclosed as the program requires.
4. Accept lower leverage. A discounted lease can still work if the coverage ratio and equity hold up, subject to lender guidelines.
Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, and Lendmire brokers that path. The complete DSCR loans guide walks through how those programs work, including credit tiers around 660 for most programs and 700+ for the strongest leverage.
Risks and What Happens If the Plan Changes
Short terms run out. The hard money term is 6-18 months, and the exit depends on a takeout loan that must accept the tenant situation. If the family lease blocks the refinance, you may be left extending or selling.
Misstatement is the larger risk. The affidavit says nobody in your household will occupy the property. If that is untrue, the loan is exposed to acceleration and other consequences. Disclosure protects you.
Tax treatment varies; consult a qualified professional.
Frequently Asked Questions
Can a hard money lender stop me from renting to a relative?
Possibly. The conditions come from the program’s guidelines and the affidavit you sign, not from a single federal rule. Some lenders allow a separate-household relative with a market-rent lease, while others exclude related-party tenants. Confirm before you contract.
Does a market-rent lease make a family tenant automatically fine?
No. It helps, and it is usually required, but it varies by program. A strict overlay can still exclude the tenancy, and a lease does not cure household occupancy.
Does an LLC avoid the family-tenant issue?
No. Entity ownership does not make a related tenant unrelated, and some programs bar any member of the entity from occupying. Eligibility is subject to lender program guidelines.
What rent does the lender count on a family lease?
Most programs count the lower of the signed lease rent and the appraiser’s market rent. Rent above market earns no extra credit, and rent below it reduces coverage.
Do I have to disclose that the tenant is family?
Yes. Disclose at application. The signed affidavit is the basis for the loan, and an undisclosed relationship discovered later damages the file.
If you are buying, rehabbing or refinancing an investment property on a short timeline and want to see how the numbers work, Lendmire can help you compare hard money options based on the project, the exit plan, leverage, and your goals. Call 828-256-2183 or request a quote. A family lease is easiest to handle when the exit loan’s rules are read before the lease is signed.
For current guidelines and terms, see Lendmire’s hard money loan programs page.
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
2. Nolo: Protections for Tenants After a Landlord’s Foreclosure
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Keeping Seller Financing vs Refinancing Into a Hard Money Loan · Joint Venture vs LLC vs Tenants-in-Common on a Hard Money Loan · Cash vs Gap Loan vs Hard Money Modification for a First Flip
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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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.