The Quick Read: The way through runs via the title company. The option gets disclosed and reviewed, then released, recorded and subordinated, or closed out, so the new lender can take a first-lien position without the option standing ahead of its loan. A DSCR loan (debt service coverage ratio loan) qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. It does not skip title review. The option is a title problem first and an income problem second.
- Here, “unrecorded option” means an option to buy the rental that was never filed in the public land records.
- A title insurer lists a known option as an exception on its policy whether or not it was recorded.
- The three clean fixes are a signed release, a recorded memorandum with a subordination, or a sale or payoff if the holder exercises.
- Coverage, leverage, and credit still have to work, and they are reviewed separately from title.
- State law on unrecorded interests varies, so a real estate attorney should review the option itself.
What Is an Unrecorded Option, and Which Kind Do You Have?
An option to purchase is a right, usually paid for, to buy a property at a set price within a set period. Unrecorded means nobody filed the agreement, or a short summary of it, with the county. The option still exists between the parties. It just does not show up on a routine record search.
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Options show up in a few forms. Pin down which one you have before you call anyone, because the fix depends on who holds the right.
| Who holds it | What the lender sees | Typical fix |
|---|---|---|
| Tenant in a lease-option | Lease plus a side option | Release, or sale to the tenant |
| Former seller (repurchase right) | Prior deed or side letter | Signed release |
| Family member or partner | Informal side agreement | Release or recorded memorandum |
| Right of first refusal in a lease | Lease clause on a sale | Waiver or release |
A lease-option is usually two documents. One is an ordinary lease. The other is a separate option, often with a share of each month’s rent credited toward the price. The credits matter later, because they affect how the rent is read.
A right of first refusal is a cousin of the option. The holder does not get to force a sale. They get the first chance to match an offer. Title and lenders treat it as a similar cloud.
Why Doesn’t “Unrecorded” Make the Option Disappear?
Recording status changes who is protected, not whether the right exists. A title-underwriting manual republished by Virtual Underwriter says an option to purchase must be listed as an exception on the title commitment and policy, recorded or not. The manual is old, so treat it as a statement of the general principle.
The same manual notes that insurers look closely at options buried in leases. They check whether the option is stated with a price, whether it runs too long, and whether state law makes it recordable. An option that is not tied to the land is generally treated as uninsurable unless state law treats it as an interest in real estate.
Notice is the other half. A Buchanan Ingersoll & Rooney case summary restates the general rule that an unrecorded conveyance is void against a later good-faith purchaser who paid value and had no notice. The bank in that case won on its priority claim. The catch is the phrase “without notice.” A lender that learns of the option through a lease, a borrower disclosure, or an occupant’s paperwork is on weaker ground.
That is why staying quiet is not a plan. Once the option is known, the title company lists it. Once the lender has seen the lease, it cannot pretend it did not.
State rules on recording and notice differ. The California Department of Real Estate reference book says an option to purchase, or a lease with a right of first refusal, does not need to be recorded to affect title. It also says a standard title policy does not cover claims found only by physical inspection, and it advises asking the insurer about extended coverage. That is a California publication, so use it as an illustration. Your state may weigh these facts differently, and that is a question for an attorney.
A related edge case: a lease may be recorded while a later amendment adding an option or renewal is not. Whether that amendment binds a new owner or lender turns on what the record gave notice of. It is another reason to read the whole lease file, not just the first page.
How Will the Lender and Title Company Find It?
They will find it through the paper trail you hand over. The title search covers the public record. An unrecorded option only surfaces through disclosure, and that disclosure usually arrives in one of four ways:
- The borrower discloses it on the application or in a certification.
- The lease or a side agreement refers to it.
- A tenant estoppel (a signed statement from the tenant confirming the lease terms and any rights they claim) mentions it.
- The title company or appraiser notices an occupant whose rights do not match the record.
The Buchanan Ingersoll summary notes that an estoppel is a common way an option or right of first refusal comes to light. For a rental refinance, expect the lender to ask for the lease and any side agreements. On most DSCR files we place across the wholesale network, the lease is part of the standard package anyway.
Once the option is known, the title company lists it as an exception, or asks for a release before it will insure the new loan. That decides the file. The lender wants a first-lien policy without an exception that lets someone else take the property out from under it.
Four questions drive the outcome:
1. Can the lender get a first-lien title policy without an exception covering the option, or with a release or subordination?
2. Is the option enforceable at all? A missing price, an expired term, or state recording rules can matter.
3. Who holds it: a tenant in possession, a third party, or a former seller?
4. Can you deliver a release or estoppel before closing?
What Are Your Options for Clearing It?
You have four realistic routes. Pick based on whether the option holder is cooperative and whether you want the option to survive.
| Route | Who must sign | Effect on the refinance | Main risk |
|---|---|---|---|
| Release or termination | Option holder | Cleanest; removes the exception | Holder may refuse or ask for payment |
| Expiration, documented | Often the holder | Works if the term truly ended | Disputes over whether it expired |
| Record memorandum, subordinate | Holder and owner | Option stays, behind the new lien | Not every lender accepts it |
| Exercise or payoff | Holder and buyer | Becomes a sale or payoff, not a refinance | You lose the property |
A signed release recorded in the county is the strongest outcome. The Oregon Real Estate Forms advisory on title insurance explains that an option holder typically has the right to record the agreement or a memorandum of it. It also says buyers should object to expired options that appear in title. If your option has run out, get that in writing and have it cleaned off the record.
Recording a memorandum is a compromise. A Clark Meyers law-firm explainer says landlords often resist recording because it clouds title and complicates financing. It adds that a memorandum showing only the option’s existence and term, without the price, is a common middle ground. Whether a given lender will accept a surviving, subordinated option is a program-by-program call. Many will not, because the whole point of the loan is a clean first position.
Exercise is the honest fork. If the holder is ready and able to buy, you are no longer refinancing. You are selling, and the old loan gets paid off.
How Do You Refinance a DSCR Rental With an Unrecorded Option, Step by Step?
Work the problem before you list the property for a refinance. Fixes that need another person’s signature are the slow part. Here is the order that works best.
1. Pull the record. Ask the county recorder or a title company what is on file against the property. Confirm that nothing recorded mentions the option.
2. Gather every document. That means the option agreement, any amendments, the lease, rent-credit records, payment history, and any termination or expiration letter.
3. Get an attorney’s read. Have a real estate attorney confirm whether the option is enforceable, who holds it, and what your state does with unrecorded rights. This is a state-law question, not a lender question.
4. Choose the fix. Decide between release, documented expiration, recorded memorandum with subordination, or a sale. Start the conversation with the holder.
5. Order the title commitment. Tell the title company about the option up front. Ask which exceptions would remain and what they need to remove them.
6. Collect an estoppel if a tenant is in place. The tenant confirms the lease terms and says in writing whether they claim any option or purchase right.
7. Submit the file. The lender reviews the title commitment, the lease, and the property, along with credit and coverage.
8. Close only on a clean policy. The new lender’s title policy insures the first lien. Whether the option is excepted, released, or subordinated decides if the loan can go forward.
Lendmire, a mortgage broker arranging DSCR investor loans through select lenders in its wholesale network across 41 markets, including Washington, D.C., sees this same bottleneck on many title-heavy files. The paperwork gap, not the rent, is usually what stalls things. Raising the option early keeps the surprise away from the lender.
What Changes in the DSCR File Itself?
Title is the gate. After it, the normal DSCR checks still apply. Here is how they interact with an option.
Coverage. DSCR compares the property’s rent to its full monthly obligation: principal, interest, taxes, insurance, and any association dues, together called PITIA. A coverage number of 1.00 is where select programs start. Stronger ratios open better pricing and leverage. A separate path below 1.00 is available through select lenders in the network, with leverage and terms adjusted. Lendmire’s piece DSCR Refinance for a Rental With Coverage Below 1.00: The No-Ratio Option covers that route. Clearing 1.00 is not the same as positive cash flow, because repairs, vacancy, management, and capital costs sit outside the ratio.
Rent. A lease-option tenant often pays more than market rent, with part of each payment credited toward a future price. Many programs lean on market rent from the appraisal, so a premium tied to the option may not count in full. A lender may also prefer a standard lease to one with option language. Treatment varies by program, so ask before you assume the full lease rent counts.
Leverage and seasoning. Seasoning means how long you have owned the property before refinancing. On cash-out refinances of standard rentals, most programs in the network top out around 75% LTV (loan-to-value, the loan as a share of the property’s value). About six months of ownership is the common expectation. A rate-and-term refinance, which pays off the old loan without taking cash out, can go higher on select programs, up to 85% LTV on an investment property. An option dispute does not change those limits, but it can delay the date you can actually close.
Credit and reserves. A 620 score is the floor in parts of the network. Most programs want around 660, and 700 or more unlocks the strongest leverage tiers. Reserves, meaning cash left after closing, commonly run about six months of PITIA. They step up to about nine months above $1,500,000. Loan sizes reach up to $3,000,000 on standard programs. All of this is typical, not guaranteed, and each file is underwritten individually.
Prepayment. A prepayment penalty is a fee for paying a loan off early. If the holder later exercises the option, the sale pays off your loan, and any penalty on that loan applies. Read that term before you sign.
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.
Two Worked Scenarios
These are modeled examples with no dollar figures. The coverage ratios are assumptions, not market data.
A tenant with an unrecorded option. Picture an investor who rents a duplex unit to a tenant under a lease with a side purchase option that was never recorded. The rent is high because of the option premium. Modeled on the premium rent, coverage looks like roughly 1.3x. Modeled on appraised market rent, it drops toward 1.1x. The title company lists the option as an exception. The tenant signs a release and an estoppel confirming no other rights. The investor then replaces the lease with a standard one. The file now rests on market rent and a clean policy. If the tenant refuses to release, the investor must either wait for the option to expire or sell to the tenant.
A family option. Say an investor bought a rental from a relative, who kept a handwritten right to buy it back. It was never recorded. The title company finds out through the borrower’s disclosure. The relative signs a release, and the attorney records it. Coverage was never the issue here, sitting near 1.2x on the appraisal’s market rent. The only work was getting a clean title. If the relative will not sign, the file stays blocked until an attorney resolves the dispute.
When Should You Hold Off on Refinancing?
Pause if any of these apply.
- The option holder will not sign, and the option is still in force.
- You cannot tell whether the option expired, and nobody can document it.
- The holder is a tenant who plans to exercise soon.
- The deal only works on option-inflated rent that will not hold up at market rent.
- You are inside a prepayment period on the existing loan, and a pending sale would trigger it.
- You have not told the lender or title company about the option.
Any of these means the next move is a conversation with an attorney and the option holder, not an application. Good files come together when the holder, the title company, and the lender all see the same facts.
Key Terms Defined
Option to purchase: A right to buy a property at a set price within a set time, usually paid for up front.
Memorandum of option: A short filing that tells the public an option exists without spelling out the price.
Title exception: An item the title insurer says the policy will not cover, such as a known option.
Estoppel: A signed statement, often from a tenant, confirming the lease terms and any rights they claim.
Subordination: An agreement that one right or lien ranks behind another, such as an option sitting behind the new loan.
Seasoning: The waiting period a lender wants between buying a property and refinancing it.
DSCR: The rent divided by the monthly obligation (PITIA). Select programs start at 1.00.
Frequently Asked Questions
Will a lender refuse a loan because of an option?
Not automatically. The lender’s concern is title. If the option can be released, expired, or subordinated so the policy insures a clean first lien, the file can move forward, subject to lender guidelines. If the option stays ahead of the loan, most lenders will not proceed.
Does it matter that the option was never recorded?
It matters less than people think. Recording protects later buyers who have no notice, but a title insurer lists a known option regardless. A lender that learns of the option through a lease or disclosure cannot rely on the missing recording.
Can I record it now?
Often yes, and the holder usually has the right to do so. A memorandum is the common form. But recording makes the option visible, which can block the refinance. Whether to record a memorandum or seek a release is a decision to make with an attorney.
Can I count the rent from a lease-option tenant?
Usually the lender reviews the lease and the appraiser’s market rent. A premium tied to the option may not count in full. Replacing the lease with a standard one is a common fix. Treatment varies by program.
What if the option holder won’t sign a release?
Then the file waits. Options are to let the option expire if it truly can, to negotiate a payment for the release, to sell to the holder, or to have an attorney test enforceability. The loan can only proceed once the title company can insure around the option.
Next Steps
Start with the record and the paperwork, then bring in an attorney. Tax treatment varies; consult a qualified professional before relying on any tax assumption in a sale or payoff. For the full program picture, see Lendmire’s complete DSCR loans guide. If your option is a private note instead, Lendmire’s piece How to Refinance a Rental With an Unrecorded Note Into a DSCR Loan covers that case.
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. Terms are subject to lender guidelines, and nothing here is a commitment to lend.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage focused on investor financing, arranging DSCR loans in 40 states plus Washington, D.C. — 41 markets total. Qualification is based on the property’s income rather than personal income documentation, subject to lender guidelines, making it a fit for LLC-held rentals and scaling portfolios. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Virtual Underwriter, Underwriting Manual: Options To Purchase
2. Buchanan Ingersoll & Rooney, unrecorded lease with right of first refusal
3. California Department of Real Estate Reference Book, Chapter 5
4. Clark Meyers, Option to Purchase in a Commercial Lease
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: DSCR Buyout Refinance vs Assumption vs Selling a Divorce Rental · How to Re-Quote Rental Insurance When a Renewal Sinks Your DSCR · How to Shop and Document Rental Insurance Before 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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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.