DSCR and Investor Loan Glossary

1007 rent schedule

A 1007 rent schedule is the one-page form, Fannie Mae Form 1007 and Freddie Mac Form 1000, that an appraiser completes alongside an investment property appraisal to estimate what the property would rent for on a standard twelve-month lease. The appraiser selects comparable rentals nearby, adjusts them for differences, and arrives at a market rent figure. On a DSCR loan that figure is the lender's independent check on the rent the borrower reports or the lease states.

ARV (after-repair value)

After-repair value, or ARV, is the appraiser's estimate of what a property will be worth once a planned renovation is complete, based on comparable sales of already-renovated properties rather than its current condition. It is the value a fix-and-flip or renovation loan is sized against, and it is a projection: it depends on the scope of work actually being finished to the standard the comparables assume. A property has one as-is value and one ARV; the gap between them is the equity the renovation is expected to create.

Blanket loan

A blanket loan is a single mortgage secured by several properties at once, closed in one transaction with one payment, usually carrying a partial release clause so an individual property can be sold out of the collateral pool.

BRRRR

BRRRR stands for buy, rehab, rent, refinance, repeat. It is an investing sequence in which a property is purchased below its stabilized value, renovated, leased to a tenant, and then refinanced on a long-term loan sized to the new appraised value, so that the cash released at the refinance funds the next purchase. The financing step is where the strategy succeeds or fails, because the refinance lender's seasoning rules and leverage ceiling decide how much of the original capital comes back out.

Business-purpose loan

A business-purpose loan is financing made for an investment or commercial purpose rather than for a borrower's own home, which places it outside TILA, RESPA and HOEPA and is why these loans are not available on owner-occupied properties.

Source: 12 CFR § 1026.3(a)

Cap rate

Capitalization rate, or cap rate, is a property's annual net operating income divided by its purchase price or value, expressed as a percentage. Net operating income is rent and other income less operating expenses, before any loan payment, so the cap rate describes the property's unlevered yield and lets two properties be compared without regard to how each is financed. It is a valuation and comparison measure, not an underwriting ratio: a DSCR loan is sized on coverage, not on cap rate.

Cash-out refinance

A cash-out refinance is a new mortgage that is larger than the loan it pays off, with the difference paid to the borrower at closing. The new loan is sized as a share of the property's value, so the cash available depends on the appraised value, the lender's cash-out leverage ceiling, and the balance being retired. Lenders apply tighter terms to a cash-out than to a rate-and-term refinance, and on a recently purchased property the value used may be the purchase price until a seasoning period has passed.

Draw schedule

A draw schedule is the plan under which a renovation or construction lender releases the loan's rehab or construction funds in stages, as work is completed and inspected, rather than at closing. Each draw corresponds to a defined portion of the scope of work; the borrower typically funds the work, requests the draw, and is reimbursed after an inspector confirms it is done. The schedule sets the borrower's cash-flow burden during the project, because money is spent before it is drawn.

DSCR (debt service coverage ratio)

DSCR is a rental property's gross rental income divided by its full monthly housing payment, and it is the ratio a business-purpose rental loan is underwritten on in place of the borrower's personal income.

Entity vesting (closing in an LLC)

Entity vesting means taking title to a property, and signing the loan, in the name of a legal entity, most often a limited liability company, rather than in the borrower's personal name. Business-purpose lenders commonly allow or require it, and the individual members usually sign a personal guaranty behind the entity. The lender reviews the entity's formation documents and operating agreement to confirm who has authority to borrow. Vesting in an entity separates the property from the owner's personal holdings; it does not by itself change how the loan qualifies.

Interest-only

An interest-only loan, or an interest-only period on a loan, is a structure in which each payment covers the interest accrued and none of the principal, so the balance does not decline while the period runs. The payment is lower than a fully amortizing payment on the same balance, which raises the property's coverage ratio during that period, and the full principal remains due at maturity or at the end of the interest-only term, when the payment resets to amortize. It is common on bridge, renovation and construction loans.

ITIN

An Individual Taxpayer Identification Number, or ITIN, is a nine-digit tax-processing number the Internal Revenue Service issues to people who have a United States tax filing obligation but are not eligible for a Social Security number, including many foreign nationals who own property in the country. Because it is a tax identifier and not a work or immigration authorization, it does not on its own establish a borrower's residency status. Some business-purpose lenders accept an ITIN in place of a Social Security number on an investment property loan.

LTARV (loan to after-repair value)

LTARV measures a renovation loan against the property's projected value once the scope of work is complete, rather than against what the borrower paid for it.

LTC (loan-to-cost)

Loan-to-cost, or LTC, is the loan amount divided by the total cost of a project: the purchase price plus the renovation or construction budget, and sometimes closing and carrying costs. It is used on fix-and-flip, construction and value-add loans, where the finished value is not yet real. LTC is often confused with LTV; the two measure a loan against different bases, cost versus value, and a loan well inside its LTV ceiling can still be constrained by LTC when the budget is large relative to the price.

LTV (loan-to-value)

Loan-to-value, or LTV, is the loan amount divided by the property's value, expressed as a percentage. On a purchase, most lenders use the lower of the purchase price and the appraised value as the denominator; on a refinance, they use the appraised value, subject to any seasoning rule. LTV measures how much equity stands between the lender and a loss, so it is one of the main inputs to pricing and eligibility. Combined loan-to-value, or CLTV, adds any second lien to the numerator.

Market rent

Market rent is the rent a property would command if it were offered for lease today to a typical tenant, as opposed to the rent a current lease actually charges. On an investment property loan it is established by the appraiser, usually on a 1007 rent schedule, from comparable rentals in the area. A lender may qualify the loan on market rent, on the in-place lease, or on the lower of the two, and which one is used is a program rule that can change the coverage ratio materially.

No-ratio

A no-ratio loan is a rental property loan written with no debt service coverage test at all, underwritten instead on the property, the borrower's credit profile and reserves, in exchange for lower leverage.

Non-warrantable condo

A non-warrantable condominium is a unit in a project that does not meet the eligibility standards Fannie Mae and Freddie Mac set for condominiums, so a conventional lender cannot sell a loan on it to either agency. Common reasons include a large share of units held by one owner or by investors, an unfinished or litigating project, a high proportion of commercial space, or an association with inadequate reserves or delinquent dues. Business-purpose lenders underwrite the project themselves and can finance a non-warrantable unit, usually at lower leverage.

Partial release

A partial release is a clause in a mortgage secured by more than one property that lets the borrower sell or refinance a single property out of the collateral pool without paying off the entire loan. The lender releases its lien on that property in exchange for a defined paydown, usually the loan balance allocated to it at closing plus a premium, and the remaining properties continue to secure the reduced loan. Without it, selling one property in a blanket loan means retiring the whole loan.

PITIA

PITIA is the all-in monthly housing payment on a property — principal, interest, taxes, insurance and any HOA or association dues — and it is the denominator of the debt service coverage ratio.

Prepayment penalty (step-down)

A step-down prepayment penalty is a fee for paying a loan off early that declines each year the loan is held — a 5/4/3/2/1 structure charges 5% of the balance in year one, 4% in year two, and nothing after year five.

Rate-and-term refinance

A rate-and-term refinance is a new mortgage that replaces an existing one without putting cash in the borrower's pocket beyond a small allowance for closing costs. It changes the rate, the term, the amortization or the loan type, and the new balance is limited to the payoff of the old loan plus costs. It is underwritten more generously than a cash-out refinance, which is why the distinction matters: the same property at the same value often qualifies for higher leverage on a rate-and-term than on a cash-out.

Recourse / non-recourse

A recourse loan gives the lender the right, after foreclosing on the property, to pursue the borrower or guarantor personally for any shortfall between the sale proceeds and the debt. A non-recourse loan limits the lender's remedy to the collateral itself, except where the borrower has committed specified bad acts, such as fraud, misapplication of rents or an unauthorized transfer, which are known as carve-outs. Most business-purpose residential loans are full recourse through a personal guaranty; non-recourse structures are more common on larger commercial loans.

Reserves

Reserves are the liquid funds a borrower must still hold after closing, measured in months of the property's full monthly payment. They demonstrate the borrower can carry the loan through a vacancy, a repair or a late rent without defaulting, and lenders count cash, bank and brokerage balances, and often a share of retirement accounts toward the requirement. The number of months required rises with the loan size, the number of financed properties and the risk of the program, and reserves cannot be borrowed.

Seasoning

Seasoning is the time a borrower must hold title before a lender will value the property at its current appraised value rather than its purchase price, which is what decides how much equity a cash-out refinance can release.

Vacancy

Vacancy is the share of potential rental income lost while a unit sits empty between tenants or goes uncollected. In an income analysis it is deducted from gross potential rent, with credit loss, to reach effective gross income. Many DSCR programs apply no vacancy deduction and divide gross rent by the full monthly payment; others, and most commercial underwriting, apply a vacancy factor first, so the same property produces a different coverage ratio under the two conventions. A unit with no lease at closing may be qualified on market rent.