The Quick Read: A recorded option to buy your rental is a title problem before it is an income problem. The new lender needs an insured first-lien mortgage, and a live recorded option can block that. Your job is to get the option released, subordinated, or accepted by the lender before closing. The rent-versus-payment math runs separately.
- A recorded option shows up in the title search and appears as an exception on the title commitment.
- Four paths exist: release it, subordinate it, find a lender who accepts it as is, or let it expire and prove that it has.
- The option holder’s cooperation decides most outcomes, so reach out early.
- Clearing the coverage test does not clear title. Both gates have to open.
- Whether a lender accepts a subordinated live option is a lender-by-lender question, and programs change.
Key Terms Defined
Memorandum of option: A short document recorded in the county records that gives public notice of an option to buy. The full contract usually stays private.
Title commitment: The title company’s preview of what it will insure, including every recorded interest it found.
Schedule B exception: An item the title policy will not cover. Each exception narrows the protection the lender receives.
Subordination: A signed agreement that moves one party’s interest behind another’s. Here, the option holder agrees that your new mortgage ranks first.
Release: A recordable document in which the option holder gives up the option. Once recorded, the cloud is gone.
DSCR (debt service coverage ratio): The property’s monthly rent divided by its monthly payment, covering principal, interest, taxes, insurance, and any association dues. Lenders call the payment PITIA.
Seasoning: The waiting period a lender wants between owning a property and refinancing it.
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Why a Recorded Option Stops the Refinance
A recorded option clouds title, and a cloud on title makes it hard to sell or refinance. CREUniversity says as much: recording is the option holder’s protection, and it works as intended. For you, the owner, that protection becomes an obstacle.
A DSCR loan qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. That is how the income test works. Title is a separate test. The lender wants a mortgage it can insure as a first lien, and a title search turns up the memorandum.
Here is the difference between an option that sits in a lease and one that is recorded.
| Factor | Option in lease only | Recorded memorandum |
|---|---|---|
| Shows in title search | Usually no | Yes |
| Title exception | Not typically | Listed on commitment |
| Lender sees it | Through lease review | Through title and lease |
| Usual fix | Lender review of lease terms | Release or subordination |
An unrecorded option is not harmless. A lender reading your lease can still object to purchase-option language. The recorded version is simply impossible to miss, because the title company reports it.
Priority is the core issue. A buyer or lender takes property subject to whatever the public record shows. If the memorandum was recorded before your new mortgage, a foreclosing lender would take the property subject to the option. That is why lenders ask for subordination. The same priority logic holds whether the recorded instrument is an option, a lease, or something else.
How Underwriting Treats It, Step by Step
Underwriting runs on two tracks at once. The income track looks at rent, payment, appraisal, credit, and reserves. The title track looks at what is recorded against the property. The option sits on the second track, and the file does not close until it is resolved.
1. Title search and commitment. The title company finds the memorandum and lists it as a Schedule B exception. The ALTA loan policy form covers lack of priority of the insured mortgage, but items listed as exceptions fall outside that coverage.
2. Pull the underlying agreement. A title underwriter’s Q&A from FNTI explains that an exception citing only a memorandum may be read as covering only what the memorandum says. To remove it, the agent has to obtain the full agreement and confirm it is terminated with certainty. That discussion concerns leases, but the logic carries over to options.
3. Classify the option’s status. Is it expired, terminated, or still live? Everything else follows from this.
4. Choose the cure. That means a release, a subordination, or a lender who accepts the option as is.
5. Record the cure before closing. Ask the title company to review the form first and whether it wants to handle the recording.
6. Close with an insured first lien. The coverage math never changed. The title gate simply opened.
One practical note from the lending side. Across the wholesale network Lendmire places files with, the expectation is consistent even though specific guidelines differ: a clean, insured first-lien position. How a lender treats a live option that has been subordinated varies by lender, so a broker who sees many guidelines can steer the file toward the lender whose rules fit.
Where Did the Option Come From?
The origin matters because it tells you who has to sign. Here is how the common sources look from an underwriting view.
| Option type | Who holds it | What it means for the file |
|---|---|---|
| Tenant lease-option | Your tenant | Lender reviews lease; recorded memo needs cure |
| Standalone option | Buyer, partner, or investor | Release or subordination needed |
| Option from a prior wholesaler | Former contract buyer | Often stale; release still needed |
| Right of first refusal | Neighbor or association | Title may want a waiver or estoppel |
| Related-party option | Family or partner | Lender will ask who holds it and why |
Wholesaler options are a common source of surprise. Investors who bought from a wholesaler or granted an option to a partner should check the county record before applying. Seller-side practice is to demand a recordable release when an option expires, and option agreements often include a duty to deliver one. Many owners simply never asked.
Your Four Paths
Four paths exist, and the right one depends on the option’s status.
| Path | Who must sign | Best fit |
|---|---|---|
| Release | Option holder | Expired or terminated option |
| Subordination | Option holder | Live option, cooperative holder |
| Lender accepts as is | Lender decides | Rare; lender-specific |
| Expiry plus proof | Possibly nobody | State statute applies and title agrees |
Path one: termination and recorded release. This is the cleanest route. The option holder signs a recordable release, you record it, and the exception drops off the commitment. Sample clauses in option contracts commonly require delivery of a recordable release if the option is not exercised, but that is contract language and not a rule of law. Your own agreement controls.
Path two: subordination. When the option is still alive, the holder can agree to place your new mortgage ahead of it. Agents National Title’s underwriting guidance says the subordinated matter then appears as a subordinate Schedule B exception. The option survives, but it ranks behind the lender. Some lenders accept that. Others want the option gone altogether.
Path three: lender acceptance. A few lenders will look at a recorded option and decide it is tolerable, particularly if the holder is a tenant with no realistic ability to close. Treat this as the exception. It depends on the lender, the holder, and the property, and it should never be your plan A.
Path four: expiry with proof. If the option has expired, you may be able to show that. A state statute can sometimes extinguish a stale option of record. The next section explains why an expiration date alone often is not enough.
How the DSCR Side Treats an Optioned Rental
Once title is on track, the income test works as it does for any rental. For the full mechanics, see Lendmire’s complete DSCR loans guide. Here is how the option changes the picture.
Rent basis. If the occupant holds an option, the lender will look at what rent is actually paid. Option fees and rent credits can muddy the figure. A lender may want the rent supported by a lease and an appraiser’s market rent schedule rather than a number that includes credits toward a purchase. Treat this as a conversation to have early, because guidelines differ by lender.
The coverage number. Most standard programs start at a 1.00 coverage floor, where rent roughly equals the full payment. 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 not the same as positive cash flow, because repairs, vacancy, management, utilities, and capital expenses sit outside the calculation.
Rate-and-term versus cash-out. A rate-and-term refinance pays off the existing loan without pulling equity. A cash-out refinance on a standard rental tops out around 75% LTV (loan-to-value, the loan as a share of the property’s value). A cash-out on short-term-rental collateral tops out around 70%. For cash-out, about six months of seasoning is a common expectation. If you recently bought, Lendmire’s piece Rental Cash-Out Refinance for Investors Waiting on Title Seasoning covers that waiting period. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Credit and reserves. A 620 credit floor exists in parts of the network, most programs want around 660, and 700 or higher unlocks the strongest leverage tiers. Reserves commonly run about six months of PITIA. Conservative rate-and-term files under $1,500,000 can see reserves waived, and loans above that size typically step up to about nine months. All of this varies by lender and loan size, and none of it is a commitment to lend.
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.
Where the General Rule Breaks
State statutes can extinguish stale options. Some states let an old option expire of record. The California Law Revision Commission explains that California’s Civil Code section 884.010 ends an option of record unless an exercise or extension is recorded within six months after expiry. If the option states no expiry date, the six months run from recording. The commission notes that such statutes exist so title can be established from the records. Other states have their own versions, and many have none. California is an example of how one state handles it, not a national rule.
An expired date alone is not comfortable. A title insurer cannot always rely on the stated expiry, because there could have been an off-record extension. For that reason, an expired option still usually calls for a release or an underwriter’s sign-off.
Options buried in covenants. Sometimes the option lives in neighborhood restrictions or association documents. Title endorsements treat options and rights of first refusal in covenants as private rights. Agents National Title explains that such provisions must be expressly subordinate and listed in Schedule B. The underwriter may also require an estoppel letter from the association confirming the option will not be exercised in this transaction.
A lease-option tenant living in the property. This is the most common edge case for DSCR owners. The tenant’s option sits on the title side if recorded and on the underwriting side through the lease. Lenders often want tenants to subordinate any purchase option, and some title exceptions are worded to cover the tenant only, without a right of first refusal or option to purchase.
Entity vesting. Who granted the option matters. If an individual granted it and later deeded the property into an LLC, or the LLC granted it directly, the title company will want to see how the chain of title lines up. LLC-titled rentals are handled subject to lender program eligibility. For more on vesting and the entity, see Lendmire’s piece Cash-Out Refinance on a Short-Term Rental Held in an LLC: Title, Vesting and the Entity.
Due-on-sale. One legal article from Cheri Elliott warns that recording a memorandum of option can trigger a due-on-sale clause in an existing loan. That matters only while the old loan is in place. A refinance pays it off, so the concern ends at closing.
The option gets exercised after closing. If the holder exercises soon after you refinance, the new loan is paid off by a sale. Check the loan’s prepayment terms with your broker before you close, because an early payoff can carry a cost. Whether you want the option to remain live at all is a planning decision.
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 If the Option Holder Will Not Sign?
Start with the paperwork. Reread the option agreement. Many require the holder to deliver a release on request or after expiry, and a polite written demand that cites that clause can resolve it.
If the holder is silent, missing, or uncooperative, the choices narrow. You can check whether a state expiration statute applies. You can ask a real estate attorney whether a quiet-title action is appropriate. That is a court action to clear title, and it is a different category of effort than a signed release. Whether it is worth pursuing depends on the equity at stake and what the refinance is for.
An option is a legitimate recorded interest, not a clerical error. You cannot simply clear it unilaterally. Talk to a real estate attorney in your state before taking steps that affect the option holder’s rights. A broker can structure the loan around your answer, but only counsel can tell you what the law allows.
A Walkthrough: Finding It on the Commitment
Picture an investor who owns a duplex bought from a wholesaler a few years ago. The rents cover the payment with room to spare, and the credit score is solid. The investor applies for a rate-and-term refinance.
The title commitment arrives. Schedule B lists a recorded memorandum of option in the wholesaler’s favor. The investor had assumed it died when the wholesaler assigned the contract.
The title officer asks for the underlying option agreement. It shows an expiration date that passed long ago, and it requires the holder to deliver a recordable release on request. The investor sends a written request, the wholesaler signs, and the title company reviews the form and records it. The corrected commitment drops the exception, and the lender receives an insured first lien.
At no point did the coverage ratio change. The file simply could not close until the title gate opened.
Pre-Application Checklist
Gather these before you apply.
| Document | Why it matters |
|---|---|
| Option agreement and memorandum | Shows terms, expiry, and release duty |
| Current lease and rent evidence | Supports the rent used for coverage |
| Vesting and entity papers | Confirms who granted the option |
| Existing loan payoff information | Needed for either refinance type |
| Draft release or subordination | Lets title review the form early |
Also call the title company before you apply. Ask it to run a preliminary search so you see the exception before the lender does.
Common Mistakes
Assuming an expired option disappears. The recorded notice can keep clouding title until a release is recorded or a statute extinguishes it.
Assuming a DSCR loan skips title. Underwriting looks at rent and payment, but title insurance and lien priority are separate gates.
Assuming title will insure over the option. Underwriters can require waivers, subordination, or estoppels.
Relying on the memorandum alone. Title underwriters want the underlying agreement reviewed, not just the short recorded notice.
Frequently Asked Questions
Can I refinance if the option is only in the lease and not recorded?
Possibly, but the lender will still read the lease. Some lenders object to purchase-option language even when nothing is recorded. The title search will come back clean, so the question becomes how the lender views the tenant’s rights. Talk to your broker about this before you apply, because lender guidelines differ.
Does a recorded option mean the file is denied?
No. It means title has to be resolved before closing. A release, a subordination, or lender acceptance can each get the file there, depending on the option’s status and the lender. Denial usually comes only if the option stays ahead of the new mortgage and no one can clear it.
Can I take cash out with an option recorded?
The same title requirement applies. If the option is cleared, a cash-out refinance on a standard rental tops out around 75% LTV, and about six months of seasoning is a common expectation. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Does holding the property in an LLC change anything?
The lender will want to know which party granted the option and how title is vested. The entity does not make the option disappear or reduce the title requirement. Eligibility of an LLC-held property is subject to lender program requirements.
Who pays to release or subordinate the option?
That depends on the option agreement and what you negotiate with the holder. Some agreements require the holder to deliver a release at no cost. Others leave costs open. Recording and title review fees are typically the owner’s side of the refinance.
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. As a mortgage broker arranging financing through select lenders across 41 markets, including Washington, D.C., Lendmire can match a file with a lender whose guidelines fit your title situation. Reach the team at 828-256-2183.
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
2. ALTA loan policy form, mirrored by the Florida Office of Insurance Regulation
3. FNTI underwriting Q&A on memoranda in Schedule B
4. Agents National Title: subordination agreements underwriting guidelines
5. California Law Revision Commission: recorded options and expiry of record
6. Agents National Title: restrictions, easements and ALTA 9 overview
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 Refinance the Home You Moved Out of With a DSCR Loan · How to Refinance a Newly Leased Rental With a DSCR Loan · How to Shop Airbnb Insurance Before a DSCR Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.