Which rent does a DSCR lender actually use, your lease or the appraiser's number?

Question

I came across an investor refinancing a duplex in Tucson with a loyal tenant who had been there six years. She never raised the rent much, so the lease sat about 300 dollars a month under what the place would fetch today.

She ran her numbers on market rent and figured the cash out was in the bag. The appraiser agreed on market rent, but the lender went with the lower figure, which was her lease.

The ratio came up short and she left money on the table. Being a nice landlord cost her at the closing table.

The lesson:

• Many DSCR lenders qualify on the lower of the signed lease or the appraiser's market rent. It varies by lender, so ask before you apply.

Many DSCR lenders qualify on the lower of the signed lease or the appraiser's market rent. It varies by lender, so ask before you apply.

• It cuts both ways. A lease above market often gets trimmed down to the appraiser's number too.

It cuts both ways. A lease above market often gets trimmed down to the appraiser's number too.

• Check your leases months before a refi. Renewing at market rent first can change the whole picture.

Check your leases months before a refi. Renewing at market rent first can change the whole picture.

Has anyone had a refi come in short because of a below market lease, and what did you do about it?

Robin Simon · Answer

A good DSCR Lender will generally be able to do up to 120 or 125% of the market rent on an under-market lease and vise versa, 120% or 125% of actual on an over-market lease

Brian Bowman · Answer

This one bites people all the time, and the honest answer is it depends completely on the lender. From the broker side, here's what we actually see:

Some lenders use market or actual rent, whichever is less.

Some will only use market rent.

Some use actual rent, but only up to 20% over market.

And a few will use 100% of actual rents.You can also structure it as an STR but this also comes with Pro's / Con's

Same property, same lease, four different loan amounts.

The catch: the lender that gives you 100% of actual rents may come with a higher rate, maybe not. If you don't need it, don't pay for it. If actual rents plus 20% makes the numbers work at a better rate, use that lender.

That's why it matters to work with someone who can move between lenders and actually diagnose your deal, so you end up with the bank that fits that specific deal. You want a true consultant, not a loan officer who throws it against the wall and hopes for the best.

The cash-out side varies just as much. We have programs doing 80% cash-out on ARV with no seasoning, the most aggressive we've found. The right lender match is where the money is.

Disclosure: I'm a DSCR/hard money broker with DSCR Kings.

Erik Estrada · Answer

Hey Irv,

Great post! There are a lot of work arounds on rental income when it comes to DSCR financing. It all really depends on the lender you work with.

There are some lenders that will allow you to use the higher lease agreement if you have 2 months of rent to support the lease, with no restrictions. Others will use the higher of the market rent, if the lease is lower.

This is why it is very important to provide accurate rent figures upfront.

Juan Hasbun · Answer

This is a great point and it's one of the first questions I tell investors to ask before starting a DSCR refinance.

In my experience, the answer is usually: it depends on the lender.

Some lenders use the lower of the current lease and the appraiser's market rent. Others may use market rent in certain situations. That's why it's so important to understand the lender's guidelines upfront.

I've seen borrowers get surprised when a property appraises well, but the lease is significantly below market. The value wasn't the issue. The income used for qualification was.

The flip side happens too. A landlord has a lease that's well above market, but the lender uses the appraiser's rent schedule because they want to make sure the numbers are sustainable.

One thing I always tell investors is to think about refinancing long before they apply. If a unit is coming up for renewal and rents are materially below market, it may make sense to address that before beginning the refinance process.

At the end of the day, a DSCR loan is driven by the property's ability to support the debt. The question isn't just what the property could rent for. It's what rent the lender is willing to use when calculating the ratio.

A quick conversation with the lender before ordering an appraisal can save a lot of surprises later.

Justin Hopkins · Answer

This is where knowing the specific investor's guidelines can make a big difference. Just because the appraisal supports a higher market rent doesn't necessarily mean you can use that full amount to qualify.

Most programs are going to look at both the actual lease and the appraiser's market rent, with varying guidelines on which figure they can use.

Chris Seveney · Answer

Most will go with the lower rate since that is the actual cashflow. some may increase it like robin mentioned but they will also want to know more about your personal situation and if you have cash and if it is still cash flowing

Which rent does a DSCR lender actually use, your lease or the appraiser's number?

Which rent does a DSCR lender actually use, your lease or the appraiser's number?

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