How to Qualify Real Estate Investors Using Rental Lease Agreements

Real estate investors are constantly seeking efficient financing strategies that align with their portfolio goals. For mortgage brokers and loan officers, one of the most effective ways to help these borrowers qualify is by leveraging rental lease agreements. Particularly with DSCR (Debt Service Coverage Ratio) loans, rental leases are a cornerstone of the underwriting process, enabling qualification based on a property’s income rather than personal financials.

This method is ideal for self-employed investors, landlords operating under LLCs, or those managing multiple rental units. Understanding the guidelines for lease qualification allows brokers to streamline submissions, close deals faster, and grow their investor client base.

DSCR Loans and the Role of Lease Agreements

DSCR loans are based on the property’s ability to cover its own debt payments. The DSCR is calculated by dividing the gross monthly rental income by the total monthly PITIA (principal, interest, taxes, insurance, and association dues). A DSCR of 1.0 means the property breaks even, while anything above that reflects a surplus of income. Some lenders allow a DSCR as low as 0.75 for strong borrowers or properties in appreciating markets.

When existing leases are in place, borrowers can use the documented rent instead of relying solely on market estimates from appraisers. Lease agreements that reflect higher-than-average rents—if properly supported—can significantly increase a property’s DSCR and improve its qualification profile. For real estate investors, this approach offers more flexibility and often leads to better financing terms.

Core Documentation Requirements for Acceptable Leases

To be used in the qualification process, lease agreements must be clear, verifiable, and in compliance with the lender’s standards. The lease must be written in English, specify rent in U.S. dollars, and be fully executed with all relevant dates and signatures. The terms must reflect market standards in terms of duration and rent amount.

While leases that exceed 120% of the appraiser’s estimated market rent are permitted, borrowers must support these figures with at least two months of consistent rental income deposits. Payment ledgers or bank statements are typically used to validate this. Short-term leases or month-to-month agreements may be accepted, but the lender may require additional documentation showing ongoing rent payments and stable tenant occupancy.

The lease must represent an arm’s-length agreement. This means the tenant cannot be a family member, business partner, or any party affiliated with the borrower. Leases between related parties, sale-leasebacks, or boarder situations in which only a room is rented within a property are generally disqualified from consideration.

Purchases: Lease-Ready Properties and Market Rents

In a purchase transaction, the borrower does not necessarily need a signed lease at the time of application. Properties that are vacant but considered lease-ready—meaning they are free of deferred maintenance and suitable for immediate occupancy—can be qualified using market rent as determined by the appraiser through a 1007 or 1025 rent schedule.

However, if there is a lease in place at the time of purchase, and the tenant intends to remain after closing, that lease can be used for qualification purposes. It must meet all other lease eligibility criteria, including documentation quality and rent amount thresholds. This is advantageous in competitive markets, allowing investors to secure financing even if the unit is currently vacant but well-positioned to generate rental income.

Refinance Transactions and Documentation Expectations

In refinance scenarios, lease agreements carry more weight. Because the property is already in the borrower’s portfolio, lenders expect it to be income-producing. A signed and dated lease must be provided for each occupied unit. If the lease rent exceeds market rent, payment history must be documented with bank statements or other forms of proof.

If the property is currently vacant or the lease is not aligned with market expectations, the underwriter will require the property to be lease-ready. A current rent schedule must support the expected income. Some flexibility exists in delayed financing or cash-out scenarios, particularly when the property was recently acquired or rehabbed.

No-Ratio DSCR loans differ slightly. These products don’t evaluate DSCR ratios, but lease agreements are still required to confirm the investment nature of the property. Investors must show that the unit is used or intended for rental purposes. Proof of marketing or prior rental activity may be used in lieu of an active lease, depending on the program.

Appraisal and Market Rent Verification

For lease income to be considered, a market rent analysis must accompany the appraisal. Appraisers use FNMA Form 1007 (for one-unit properties) or 1025 (for two- to four-unit properties) to document fair market rents. If a lease rent is more than 120% of the market rent indicated on the appraisal, supplemental documentation must be provided. This could include a signed lease along with two months of rent receipts, bank deposit records, or a certified rent roll.

In cases where the subject property has more than four units or is mixed-use, lenders may require a full operating income and expense statement, a commercial rent roll, and even third-party vendor analysis. Some markets—such as North Carolina—allow commercial evaluations to replace BPOs for residential properties with five or more units, offering a streamlined process for brokers familiar with those guidelines.

Investor Experience and Borrower Eligibility Criteria

Borrower qualification is not limited to experienced investors, but experience can improve terms and simplify underwriting. First-time investors may still qualify for DSCR loans when buying small multifamily properties, but they must have a strong housing payment history—typically no missed payments in the past 24 months—or own a primary residence outright.

Investors seeking to purchase or refinance mixed-use properties must typically demonstrate at least one year of property management or ownership experience. This ensures the borrower is equipped to handle the complexities of buildings with both residential and commercial tenants.

Owner-occupancy is strictly prohibited under DSCR programs. The borrower may not reside at the property or rent to family members. All income must come from arm’s-length third-party tenants. For entities such as LLCs or corporations, this means leases must also show no beneficial ownership connection between tenant and borrower.

Mixed-Use and Multi-Unit Property Considerations

For buildings with a mix of residential and commercial spaces, underwriters must ensure that the majority of income is derived from residential use. Generally, at least 51% of the gross square footage and income must be residential. Commercial units must fall within market norms for the area, and leases must be documented just as thoroughly as those for residential tenants.

For residential buildings with five to ten units, borrowers will need to provide a detailed rent roll that includes unit numbers, lease dates, tenant names, and current rent amounts. An income and expense statement (commonly referred to as a T-12) may also be requested, especially for seasoned rental properties. Lenders will use this data to calculate net operating income and verify the building’s ability to sustain debt payments.

Short-Term Rental Properties: Lease Rules and Exceptions

Short-term rentals (STRs), including Airbnb and Vrbo properties, are allowed under certain DSCR programs, provided they meet specific underwriting requirements. The property must be located in a jurisdiction where STRs are permitted by local ordinance, and the borrower must submit documentation such as a business license or proof of listing activity on major STR platforms.

Income from short-term leases must be substantiated with a full year of rental history, ideally through profit and loss statements, tax returns, or third-party revenue verification. Appraisers must confirm the market rent through a 1007 or 1025 form. Additionally, the reported income must not exceed 120% of market rent unless supported by historical financials or a third-party seasonal income analysis.

No-Ratio DSCR loans do not allow qualification based on short-term rental income, as this income is considered too volatile and inconsistent for programs without a DSCR calculation.

Frequent Mistakes to Avoid When Submitting Lease Agreements

Brokers and investors often run into issues during underwriting because of incomplete or non-compliant lease documentation. A common error is submitting leases that are missing signatures, dates, or tenant information. These leases are considered invalid and may delay the approval process.

Another frequent issue is attempting to use lease agreements that involve family members or affiliated businesses as tenants. These types of arrangements raise red flags for underwriters and typically do not meet arm’s-length standards. Additionally, brokers should avoid submitting leases that reflect rent amounts far above market without providing documented proof of consistent payment.

Outdated lease terms or mismatches between the lease and the subject property (such as wrong addresses or incorrect unit numbers) are also common causes for rejection. To avoid delays, ensure all documentation is accurate, current, and aligns with the appraised value and market rent estimates.

Local Market Trends That Influence Lease-Based DSCR Lending

Understanding local market dynamics is essential when using lease agreements for qualification. In Florida, particularly in markets like Miami and Orlando, short-term rentals dominate investor activity. Brokers must be prepared to present seasonal income breakdowns, as lenders scrutinize STR income closely in this state.

North Carolina continues to see strong demand for 5–10 unit multifamily properties, especially around Charlotte and Raleigh. In these areas, investors benefit from programs that allow commercial evaluations instead of traditional BPOs, easing the appraisal burden for mid-size residential buildings.

In Texas, markets like Austin and Dallas are seeing rising rental income opportunities. However, appraisal values can vary widely by neighborhood, requiring brokers to confirm that lease rents are within 120% of market levels to avoid triggering documentation requirements. In California’s Inland Empire, where rental rates are steadily increasing, investors may be able to justify above-market leases using actual rent rolls and payment histories.

Explore NQM Funding’s Tools and Programs

Mortgage brokers looking to help investors qualify with lease agreements can leverage NQM Funding’s flexible underwriting, dedicated broker support, and a suite of tools designed for Non QM borrowers. Whether your client is a first-time investor or seasoned landlord expanding into multifamily or mixed-use, the following resources can help:

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