Investor with tablet viewing California rental property.

Qualify for a California DSCR Loan with Market Rent

Q: What is a market rent appraisal, or Form 1007?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How does Form 1007 help investors qualify for a DSCR loan?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: Can projected market rent be used to get a loan if a property is already occupied?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: What do underwriters look for when approving a loan based on projected rent?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: Is the income projection method different for short-term and long-term rentals?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: Does using projected market rent result in a higher interest rate?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: What can I do if the appraiser's projected market rent is still too low to qualify?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

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TL;DR

Qualify with Property Income: DSCR loans assess a property's rental income for loan qualification, not your personal earnings, making them highly suitable for real estate investors in markets like California.
Use Projected Rent: Lenders can use a professional market rent appraisal (Form 1007) to determine the property's income potential, rather than being limited by a current, below-market lease.
Unlock Potential: This strategy is especially effective for purchasing properties in areas like Los Angeles or San Diego where existing rents may be low, allowing you to finance a deal based on its true future earning capacity.

What is a market rent appraisal, or Form 1007?

A market rent appraisal is a professional assessment of a property's potential rental income based on current market conditions. For single-family investment properties, this analysis is officially documented on a Single-Family Comparable Rent Schedule, also known as Form 1007. This form is a standard addendum to the main appraisal report (Form 1004) and is completed by a licensed, independent appraiser.

The appraiser's job is to determine the fair market rent, which is the price a knowledgeable tenant would willingly pay for the property in the open market. They do this by finding several nearby rental properties, known as 'comparables' or 'comps', that are similar to the subject property in size, condition, location, and amenities. The appraiser analyzes the monthly rents of these comps and makes adjustments to account for any differences. For example, if a comparable property in a San Diego neighborhood has a newly renovated kitchen and the subject property does not, the appraiser will adjust the projected rent downward.

For a Debt-Service Coverage Ratio (DSCR) loan, Form 1007 is often the most critical piece of the puzzle. A DSCR loan qualifies you based on the property’s cash flow rather than your personal W-2 or tax return income. The core calculation is:

Gross Rental Income / Total Housing Expense (PITIA) = DSCR

Lenders typically require a DSCR of 1.0 or higher, with many preferring 1.25 or more. (The data, information, or policy mentioned here may vary over time.) The rental income figure used in this calculation comes directly from the appraiser’s opinion of value on Form 1007, making it a powerful tool for investors.

Why Form 1007 is Essential for California Investors

In competitive markets like California, it's common to find properties with long-term tenants paying rent that is significantly below the current market rate. If a lender were to only use the existing lease agreement, the low income could cause the property to fail the DSCR test, killing the deal. Form 1007 provides the lender with a credible, third-party projection of the property's true earning potential, allowing them to underwrite the loan based on future income, not past performance.

How can market rent be used if a property is already occupied?

This is the most common scenario where using projected market rent becomes a game-changer for real estate investors. You can absolutely use the market rent from Form 1007 to qualify for a DSCR loan even if the property is currently occupied by a tenant paying a lower amount. DSCR lenders are specialists in real estate investment and understand that acquiring a property with below-market rent is a classic value-add strategy.

A modern kitchen in an investment property representing rental potential.

Lenders are comfortable with this approach because they are underwriting the asset, not just the current lease. Their primary concern is the property's ability to generate sufficient income to cover the mortgage payment going forward. If an appraiser provides a well-supported opinion that the market rent is higher, the lender can use that figure in their DSCR calculation.

Here’s a practical example:

Let’s say you want to buy an investment property in Los Angeles for $800,000 with a 25% down payment. Your proposed monthly mortgage payment, including property taxes, insurance, and any HOA fees (PITIA), is $4,000.

Current Situation: The property has a long-term tenant on a month-to-month lease paying $3,500 per month.
DSCR Calculation with Current Rent: $3,500 / $4,000 = 0.875
Outcome: A DSCR of 0.875 is well below the typical 1.0 minimum. Most lenders would deny this loan.

However, you know the market for a similar unit is much higher. You order an appraisal, and the appraiser completes Form 1007.

Appraiser's Finding: The appraiser finds three comparable rentals in the immediate area renting for $4,900, $5,100, and $5,000. After adjustments, the appraiser concludes the market rent for your subject property is $5,000 per month.
DSCR Calculation with Market Rent: $5,000 / $4,000 = 1.25
Outcome: A DSCR of 1.25 meets or exceeds the requirements of most DSCR lenders. The loan is now approvable.

Lenders will want to see the existing lease to understand its terms. A month-to-month lease is ideal, as it provides a clear path for the new owner to either raise the rent to market rates or give the tenant notice to vacate in accordance with California law.

What do underwriters look for to approve a loan based on pro forma income?

When a lender uses projected or pro forma income, the underwriter scrutinizes the appraisal report very carefully. They need to be convinced that the projected income is realistic and achievable. Their approval hinges on the quality and credibility of the supporting documentation.

Close-up of an appraisal document and a calculator.

Here's what an underwriter focuses on:

The Quality of the Appraisal Report: The underwriter will review the entire appraisal, not just the final number on Form 1007. They look for a detailed, well-written report with clear logic. The appraiser’s selection of comparable properties is paramount. Are the comps truly similar? Are they recent rentals? Are the adjustments made by the appraiser logical and well-supported?
Proximity and Recency of Comparables: In dense urban markets like San Francisco, property values and rents can change from one block to the next. Underwriters want to see comps that are as close to the subject property as possible and that were rented out recently, ideally within the last six months. Outdated or distant comps weaken the case.
Appraiser's Comments and Justification: Experienced appraisers provide detailed comments explaining their rationale. If the market rent is significantly higher than the current rent, the underwriter will expect the appraiser to explain why. This could be due to deferred maintenance that the new owner plans to fix, or simply that the previous owner never raised the rent.
Consistency with Market Data: Underwriters may do their own high-level check using online rental data for the area to see if the appraiser’s conclusion is in the right ballpark. A Form 1007 that aligns with publicly available data is much easier to approve.
The Investor’s Plan: While not always required, a brief Letter of Explanation (LOX) from you, the borrower, can be helpful. This letter can outline your understanding of the market and your plan to increase the rent post-closing, demonstrating that you have a sound business strategy.

Does this strategy work for both long-term and short-term rentals?

This strategy works for both, but the methodology and documentation are different.

Long-Term Rentals (LTRs): For standard 12-month leases, Form 1007 is the industry-standard document used to project income. The entire process described above—using an appraiser's analysis of comparable long-term rentals—is the established path for DSCR loans on single-family homes, condos, and 2-4 unit properties.
Short-Term Rentals (STRs): For properties intended for short-term rental on platforms like Airbnb or Vrbo, a standard Form 1007 is not applicable. Lenders require a different type of income projection. They will typically ask for a report from a third-party data provider that specializes in the STR market, such as AirDNA or Mashvisor. These reports analyze data from actual STR listings in the area to project average daily rates, occupancy rates, and gross annual income. The principle is the same—using projected income to qualify—but the source of that projection is tailored to the specific business model.

It's crucial to inform your lender upfront about your rental strategy so they can order the correct type of income analysis.

Are interest rates higher for DSCR loans using projected rents?

No, using projected market rent instead of an in-place lease does not, by itself, result in a higher interest rate. Lenders view the appraiser's market rent from Form 1007 as a valid and reliable income figure for underwriting.

The interest rate on a DSCR loan is determined by a combination of other risk factors:

Credit Score: A higher personal credit score will result in a lower interest rate.
Loan-to-Value (LTV): A larger down payment (lower LTV) reduces the lender's risk and leads to a better rate. Putting down 30% will typically get you a better rate than putting down 20%.
DSCR: The final DSCR itself can impact the rate. A property with a very strong DSCR of 1.50 or higher may qualify for a better rate than one that just barely meets the minimum 1.0 requirement.
Property Type: A single-family home is generally seen as less risky than a four-unit building, which can sometimes be reflected in the pricing.

While DSCR loan rates are generally about 1-3 percentage points higher than conventional, owner-occupied mortgage rates, the method of income verification (market vs. actual rent) is not a primary pricing adjustment. (The data, information, or policy mentioned here may vary over time.)

What happens if the appraiser's market rent is still too low?

Occasionally, the appraiser's opinion of market rent on Form 1007 comes in lower than expected and is not enough to make the DSCR calculation work. If this happens, you have several options and should not assume the deal is dead.

Review and Rebut the Appraisal: Carefully review the appraisal report. Did the appraiser miss a key feature of your property? Did they use inappropriate comps? Perhaps there are better, more recent comparable rentals they overlooked. You can work with your mortgage broker to submit a formal 'rebuttal' or 'reconsideration of value', providing alternative comps and a clear argument for a higher rental value.
Increase Your Down Payment: The simplest solution, if you have the capital, is to increase your down payment. This lowers your loan amount and, consequently, your monthly PITIA payment. A lower denominator in the DSCR calculation will increase the ratio, potentially pushing it over the required threshold even with the lower rent figure.
Find a More Flexible Lender: Not all DSCR lenders have the same guidelines. Some may allow a lower DSCR (e.g., down to 1.0 or even slightly less in some cases), while others may have different ways of calculating income and expenses. (The data, information, or policy mentioned here may vary over time.) An experienced mortgage broker can shop your scenario to find a lender whose programs are a better fit.
Make Minor Property Improvements: If feasible before closing or if you're getting a renovation loan, making small, high-impact improvements could justify a higher rent. This might involve updating an appliance or fixture and then requesting an updated appraisal.

How much experience do I need as an investor to use this strategy?

One of the biggest advantages of DSCR loans is that they are very accessible to both new and experienced investors. Most DSCR lenders do not have a specific requirement for prior landlord or real estate investment experience, especially for a standard single-family home or duplex. (The data, information, or policy mentioned here may vary over time.)

The lender's primary focus is on the property's cash flow. If the numbers work and the property is in a solid market like Los Angeles or San Diego, they are often comfortable lending to a first-time investor. Their logic is that a property with strong positive cash flow is a good investment regardless of the owner's resume. You can always hire a professional property management company, which further mitigates the lender's risk.

For more complex properties, such as a larger multi-family building, or for an investor seeking to finance multiple properties at once, some lenders may look for prior experience. But for the vast majority of deals, a lack of experience is not a barrier to entry for using a DSCR loan with projected market rent.

What documentation is needed to support the higher market rent?

To successfully close a loan using projected market rent, you'll need to provide clear and credible documentation. The lender needs to build a solid file that justifies their decision to the letter.

Here is the essential documentation:

The Full Appraisal Report: This includes both the main Uniform Residential Appraisal Report (Form 1004) and the crucial Single-Family Comparable Rent Schedule (Form 1007). This is the primary document.
The Current Lease Agreement: Even though you are using market rent to qualify, the underwriter must review the existing lease. They need to see the current rent amount, the lease term (e.g., month-to-month, 12-month), and the expiration date.
A Clear Plan: While not always mandatory, a simple, one-page Letter of Explanation (LOX) can be very effective. In it, you should acknowledge the below-market rent and briefly state your intention to adjust the rent to market rates in accordance with the lease terms and local regulations after you take ownership.

By ensuring the appraisal is thorough and providing a clear context for the underwriter, you can confidently use projected market rent to finance your next California investment property.

If you're ready to put this strategy to work on a California investment property, our team is here to help. We specialize in DSCR loans and can help you find a lender who recognizes your property's true potential. Apply now to start the conversation and see what's possible.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.