The Quick Read: Lenders usually treat an unsecured family loan as a cash-out item, not a payoff-only item, because no lien exists on title for the closing agent to pay off. The family payoff comes out of the borrower’s own proceeds. Underwriters then test the new, larger loan against the rent, and they want paper showing the money was a real loan.
- No recorded lien on title usually means the file sorts as cash-out, not rate-and-term.
- On a cash-out refinance of a standard rental, the leverage ceiling is 75% LTV, subject to lender guidelines.
- The family note’s payment generally sits outside the property’s coverage ratio. The larger new loan is what gets tested.
- A signed note, proof the funds arrived, and a payoff letter keep the file clean.
- Ownership seasoning of about 6 months applies, measured from title recording.
The sorting step is where the file’s treatment is decided. An investor assumes “I’m paying off a loan, so it’s a simple refinance.” The title report says otherwise.
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Key Terms Defined
Unsecured family loan: Money a relative lent you with no mortgage or deed of trust recorded against the property.
Lien: A legal claim on property that stays until the debt is repaid.
Payoff letter: A signed statement from the lender, here the relative, giving the balance owed and confirming the debt is satisfied on payment.
Cash-out refinance: A refinance where the new loan is larger than the payoff plus costs, and the borrower receives the difference.
Rate-and-term refinance: A refinance that repays existing liens and costs, with no cash back at closing.
Seasoning: The ownership period a lender wants to see before it allows cash-out on a property.
DSCR: The property’s rent used for lender review divided by its PITIA (principal, interest, taxes, insurance, and any HOA dues).
What Does an Unsecured Family Loan Look Like to a Lender?
It looks like nothing on title. An unsecured loan rests on the borrower’s promise alone. So a title search on your rental will not show it.
That matters because the title search is how a cash-out lender finds what to pay off. A recorded private note from a relative shows up as a lien and gets paid and released through closing. A handshake loan or a signed-but-unrecorded note does not. Across the wholesale network, this is the first fork in the file: lien or no lien.
No federal regulator writes the seasoning, leverage, or coverage rules for investor cash-outs. Those are program rules set by lenders and their investors, and they differ from one program to the next. What follows is how most programs in Lendmire’s network treat this fact pattern. It is practice, not a published rule.
Loan or Gift: What Underwriters Want to See
Underwriters want proof the money was a loan and that you actually received it. A relative’s gift is not debt. A loan is. If the file calls it a loan, expect to document it as one. A complete file usually includes:
- The signed promissory note, with amount, date, and terms.
- Proof the funds reached you, such as a wire record or settlement statement.
- Any payment history, by check or bank transfer.
- A payoff letter from the relative at closing.
Relatives don’t report to credit bureaus. So lenders often ask for bank records showing payments made. The more the arrangement behaves like a real loan, the easier it is to read. Missing payments or a thin paper trail leave the underwriter with little to verify.
Edge case: if the file mixes gift and loan money, split it on paper. State how much was a gift and how much was repayable. Muddy files get questions.
How Does the Refinance Get Classified?
Most often as cash-out. Cash-out means the new loan exceeds the payoff of existing liens plus costs, as the general definition of cash-out refinancing puts it. Rate-and-term means liens and costs get repaid and nothing comes back to you.
With no lien, the family payoff is not a lien payoff line. Money goes to you at closing, and you then repay your relative from your own account. Paying off other debts is a common use of cash-out money, as the CFPB’s report on cash-out refinance borrowers describes. The lender sees cash returning to the borrower. That is a cash-out file.
The classification drives leverage. Across the network:
| Factor | Cash-out refinance | Rate-and-term refinance |
|---|---|---|
| LTV ceiling | 75% on a cash-out refinance | 85% on a rate-and-term refinance |
| Cash back at closing | Yes | No |
| Seasoning | About 6 months from title recording | Applies per program |
The gap is why misclassification hurts. Say you plan around the higher rate-and-term ceiling and the file lands in cash-out. Proceeds come in short. The family payoff can’t be fully funded.
One related situation: an all-cash buyer who wants to borrow against a recent purchase. That is a conventional rule, not a DSCR rule. If a family loan funded your “cash” purchase, expect a DSCR lender to ask how it was funded and to decide treatment by program.
Does the Family Loan Payment Count in the Coverage Test?
Generally no. DSCR looks at the property: rent used for lender review against its PITIA. A personal note owed to your uncle is not secured by the property, so it is not part of the property’s PITIA. Personal obligations sit outside the property-level test, subject to program rules.
What does change the number is the new loan. Cash-out raises the balance, so the payment rises and coverage drops compared with the old loan. Repaying family with proceeds can push a marginal file under the program floor. The minimum DSCR on standard programs is 1.00, meaning qualifying rent equal to PITIA. Stronger ratios open better pricing and leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
Clearing 1.00 is also not the same as positive cash flow. DSCR leaves out repairs, vacancy, management, utilities, and capex.
Worked Example in Ratios
Picture an investor who owns a rental outright for more than 6 months. A relative lent money for the original rehab, with a signed note and no lien. The investor wants to repay that relative and keep some cash.
| Step | Before refinance | After refinance |
|---|---|---|
| Lien on title | None from family | New first lien |
| Classification | n/a | Cash-out, 75% LTV ceiling |
| Coverage ratio | Higher (smaller or no loan) | Lower (larger loan, tested on rent) |
| Family payoff | Owed from personal funds | Paid from the investor’s proceeds |
The inputs here are illustrative. Suppose the old coverage ran comfortably above 1.2x. A larger loan can pull it toward 1.0x. If it falls below the program floor, the investor can borrow less, restructure, or look at a select-lender path with adjusted leverage and terms. Reserves matter too, commonly around 6 months of PITIA, and about 9 months above $1,500,000. Whatever is left after the payoff, costs, and reserves is the investor’s net cash. It is smaller than the headline proceeds figure. The calculator on this site can give an illustrative estimate, not a quote.
Where the General Rule Breaks
A recorded family note. A mortgage or deed of trust held by a relative is a lien. It pays off through title like any private note, and the payoff can read differently from an unsecured one. Programs vary on how much cash back they allow with a payoff of this kind. Unrecorded or poorly documented notes can complicate the lien release.
Purchase funded by the family, then refinanced. Investors who bought with a relative’s money sometimes find the repayment harder than planned. The usual options are a DSCR refinance once stabilized rent is documented, a short-term bridge, or partial payments from cash flow while the file matures.
LLC borrowers. If the family loan went to you personally but the rental sits in an LLC, or the reverse, the file needs to explain who owes whom. Vesting rules differ by program, and LLC borrowing is subject to lender program eligibility.
Deceased or entity lenders. If the relative has died or lent through an entity, the payoff letter must come from whoever now holds the debt. Plan for extra paper.
Ineligible property. Manufactured homes, log homes, and barndominiums are not offered in the network’s DSCR programs. A family loan on one of these has no DSCR cash-out path.
Proceeds used for something else. 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.
Red Flags and Fixes
| Scenario | How a lender typically reads it | What helps |
|---|---|---|
| Verbal loan, no paper | Hard to prove as debt | Write and sign a note that reflects the actual terms |
| Signed note, payments made | Clear loan history | Bank records of payments |
| Signed note, no payments | Looks like a gift or dormant debt | Explain terms in writing, show any partial payments |
| Gift mixed with loan | Unclear payoff amount | Letter splitting gift from loan |
Fixing paper after the file is in review costs time. Fix it first.
Alternatives Worth Weighing
Not every family loan belongs in the refinance. If the coverage ratio is thin, paying the relative down from cash flow keeps the new loan smaller. A short bridge can cover the gap. Or split it: take a smaller cash-out and repay part now, part later. A broker that shops several wholesale lenders can match the file to the program with the leverage and reserve rules that fit. Lendmire’s complete DSCR loans guide covers the basics of how these loans work.
STR cash-out is a different leverage tier, with a 70% ceiling on short-term-rental collateral, versus 75% on standard rentals.
How to Prepare
1. Pull the note and bank records now. Confirm the amount and date.
2. Check title or ask the relative whether anything was recorded.
3. Decide whether the loan is a gift, a loan, or a mix. Document it.
4. Run coverage on the larger loan, not the current one.
5. Plan reserves and net cash after payoff and costs.
6. Ask the relative for a payoff letter and a clear wiring instruction before closing.
Frequently Asked Questions
Will a lender treat repaying my family loan as a rate-and-term refinance?
Usually not. Rate-and-term means the new loan pays off recorded liens and costs, with no cash back. An unsecured family loan has no lien, so the repayment comes out of your proceeds. That makes the file cash-out, with the 75% LTV ceiling on a standard rental, subject to lender guidelines.
Does the family loan payment hurt my DSCR?
Generally not directly. The coverage test compares rent to the property’s PITIA. A personal note isn’t secured by the property. The indirect effect is that a larger cash-out loan raises the payment and lowers coverage.
What paperwork should I have ready?
A signed note, proof the funds were received, any payment history, and a payoff letter from the relative. If gift and loan money were mixed, a letter splitting them helps. Requirements vary by program.
Can I repay a relative if I bought the property less than 6 months ago?
Seasoning of about 6 months, measured from title recording, is the common cash-out expectation. Some programs treat recent all-cash purchases differently. Whether a family-funded purchase counts as cash depends on the program and how the loan is documented.
Does a recorded family note change anything?
Yes. A recorded note is a lien and pays off through title. That can change classification and how much cash back the program allows. Ask the title company what is recorded before assuming either way.
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. Call 828-256-2183 or request a quote. Programs change, and every file is underwritten individually by the lender; this is not a commitment to lend.
A deeper walk-through of investment-property equity extraction lives in Lendmire’s guide to cash-out refinance on an investment property.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
As a DSCR and non-QM mortgage broker, Lendmire — NMLS# 2371349 — connects investors with wholesale lending channels across 41 markets, including Washington, D.C. The property’s rental income, not the borrower’s tax returns, is central to lender review, which works for self-employed operators and portfolios beyond four financed properties. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. CFPB: CFPB Report Finds Cash Out Mortgage Refinance Borrowers Improve Credit Scores
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: How to Qualify and Apply for a DSCR Cash-Out Refinance on a Rental With a Section 8 Tenant · How Lenders Underwrite a DSCR Cash-Out Refinance to Buy Another House · How to Get a Rental Ready for a Cash-Out Refinance Appraisal
Brandon Miller
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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.