A relative is not an eligible tenant under our DSCR lease requirements. A lease signed with your mother, your son, your sister or your spouse is not the lease that qualifies the loan, and that holds whether the rent is below market, at market, or above it. The disqualification is about who signed the lease, not what they pay.
That leaves two questions worth answering properly. What does the file look like when the only lease in place is a family lease, and can the rent under that lease be replaced with the appraiser's market rent estimate so the DSCR still works? On a purchase the second question mostly disappears, because market rent is what we use anyway. On a refinance the answer is no. Below-market rent is not marked up to market. The only rent adjustment in the program that runs upward is capped, and it applies to the opposite situation.
What "eligible tenant" actually means
Our lease requirements do not describe an ideal tenant. They define the tenant by exclusion, and the exclusion list is wider than most borrowers expect.
An eligible tenant is any party other than the borrower or any guarantor; any affiliate; any officer, director, executive employee or manager of the borrowing entity; and any family member of any person or entity in that list. The family category is spelled out as including spouse, siblings, ancestors and lineal descendants.
| Proposed tenant | Eligible tenant? |
|---|---|
| Unrelated third party | Yes |
| The borrower | No |
| Any guarantor on the loan | No |
| An affiliate of the borrowing entity | No |
| An officer, director, executive employee or manager of the borrowing entity | No |
| A spouse, sibling, ancestor or lineal descendant of anyone above | No |
| A corporation or LLC named as the tenant | Not by default. All tenants on leases must be natural persons. Exceptions for other entity types may be considered case by case |
Two things about that table are easy to miss.
First, the exclusion does not stop at your own relatives. It reaches the relatives of everyone in the excluded group. If your borrowing entity has a manager who is not you, that manager's spouse is not an eligible tenant of your property either.
Second, "ancestors and lineal descendants" is a vertical line, not a synonym for close relatives. Your parents, grandparents, children and grandchildren are all on it.
Two sentences, two different words for family
The lease requirements say this twice, and not in identical language.
The eligible tenant definition uses "any family member (including spouse, siblings, ancestors, and lineal descendants)." A separate bullet in the same section says no borrower or guarantor, or owner of the borrower or guarantor where that borrower is a legal entity, or their immediate family members may be a lessee.
Our change log dates that second bullet: the eligible tenant section was re-worded on 10/16/2023, and that is when the immediate-family lessee sentence and the natural-persons sentence were added. So the immediate-family phrasing is the newer of the two. Both point the same direction, and neither creates an opening for a family lease. But they are not word-for-word the same, and the broader phrasing is the one that sits inside the definition itself, introduced with "including," which is open-ended language rather than a closed list.
What the guideline does not do is define "immediate family" for tenancy purposes. There is a defined list of close relatives elsewhere in the program, but it is expressly a gift-funds definition and it governs who may give a borrower down payment money. It is not written as a tenant test, and it should not be imported as one. That list excludes uncles, aunts, cousins and nieces or nephews from the gift-funds category, and it is tempting to read that as permission to lease to a cousin. Do not read it that way. The tenant definition is not that list.
Non-arm's-length is a different test, and it does not rescue the lease
Borrowers often reach for the non-arm's-length section here, because it plainly contemplates family involvement. That section exists and it is real, but it governs the transaction, not the tenancy.
A non-arm's-length transaction exists whenever there is a personal or business relationship among parties to the transaction, which can include the seller, builder, real estate agent, appraiser, lender, title company or another interested party. Several of those are eligible, including family sales or transfers, assignment of contracts, a property seller acting as their own agent, a relative of the seller acting as the seller's agent, a borrower acting as their own agent, a relative of the borrower acting as the borrower's agent, and a borrower purchasing from their own landlord, which requires cancelled checks or bank statements verifying the pay history.
So buying a rental from your parents is a recognized, eligible transaction shape. Leasing that rental back to your parents is a separate question answered by the lease requirements, and the answer there is no.
One tension worth naming rather than smoothing over. Our property flips section, added 09/04/25 and therefore newer than the general non-arm's-length section, states flatly that non-arm's-length transactions are not permitted, alongside chain-of-title review and an open-market-marketing requirement. Read in place, that language sits inside the additional requirements that attach when a property meets the flip definition. It does not read as a repeal of the general list. If your file involves both a family sale and a property that meets the flip test, treat those two passages as an open point and get it resolved in underwriting before you spend on a second appraisal.
Can below-market family rent be uplifted to market?
This is the part borrowers usually care about most, and the mechanics are clean once you separate purchase from refinance.
| Situation | Gross rent used in the DSCR calculation |
|---|---|
| Purchase | 100% of the gross market rent on Appraisal Form 1007 |
| Refinance | The lesser of the lease agreement or Form 1007 |
| Refinance, lease above market | The lease amount may be used, subject to a cap over the appraisal's market rent |
| Fully furnished, lease in place above market | Revert to market rent |
| Fully furnished, no lease | Treated as vacant, with a 5% LTV reduction |
The asymmetry is the whole story. On a refinance we take the lower of the two numbers. There is a carve-out that lets an above-market lease be used, and it is capped; that mechanic belongs to [our page on a lease above market rent](/blog/lease-rent-above-market-rent-dscr-loan-10-percent-cap) and is not repeated here. There is no mirror-image provision for a below-market lease. Nothing in the program lets a $1,400 family rent be qualified at a $2,000 appraised market rent on a refinance.
On a purchase the picture is different for a reason that has nothing to do with family. Purchase DSCR is calculated on 100% of the gross market rent from Form 1007. The in-place rent is not the input. So a buyer who intends to house a relative in the property is not fighting a below-market rent problem at qualification; they are fighting the eligible tenant rule, the business purpose certification, and the occupancy tests instead.
What the file actually looks like when the tenant is a relative
On a refinance we require both a current lease agreement and Form 1007. An expired lease is workable if it contains language converting it to month-to-month at the end of the initial term.
If the only lease in the file is a family lease, that requirement is not satisfied by an eligible lease. The practical path the file falls onto is the unleased and vacant treatment, and that treatment has costs.
- Unleased properties take a 5% LTV reduction to the grid maximum on any refinance transaction. That reduction does not apply to purchases.
- The unit must be in lease-ready condition if vacant.
- Occupied or leased status is measured by unit count: a single-family property needs one unit occupied, a two-family property needs two, a three-family property needs two, and a four-family property needs three.
- A DSCR below 1.00 is not permitted for vacant properties, and 2-4 unit properties must have at least 50% occupancy.
- A DSCR below 1.00 requires six months of reserves, and loan amounts under $150,000 carry a minimum DSCR of 1.25x.
Those are the standard-program cash-out ceilings at DSCR 1.00 or higher on loan amounts up to $1,500,000, before any reduction. The 660 row is a one-unit row. Subtract the 5% unleased reduction and a 660-score cash-out on a property with no eligible lease is working from a materially lower ceiling than the borrower planned around.
Two things the guideline does not resolve, and I am not going to fill in.
It does not say whether a unit physically occupied by a relative counts as an occupied unit for the occupancy definition, even though the lease itself cannot be used. And it does not say whether rental receipts from an ineligible tenant satisfy the proof-of-receipt requirement that applies when no lease is available. That receipts framework is set out in [our page on qualifying with no lease](/blog/dscr-loan-with-no-lease-proof-of-rent-required); what it does not address is whose payments count. Both points need an underwriting answer on the specific file rather than a general rule.
Documentation the file needs
If you are going to lease the property to an eligible tenant and finance it, the lease itself has to clear a specific list. Every item below is a lease requirement in its own right.
- Fully executed by an eligible tenant and by the borrower or guarantor as landlord.
- In the name of the borrower or guarantor, or their verified property manager, as landlord.
- A unit rental rate and terms consistent with rates and terms prevailing in the local market where the property is located.
- On a form customary to the area, complying with applicable legal requirements in all material respects, including required disclosures.
- Covering 100% of the square footage of the residential unit.
- Signed by natural persons as tenants. Other entity types may be considered case by case.
- No lease term of three years or more.
- No rent-to-own arrangements and no contracts for deed. Both are ineligible.
Beyond the lease, the file carries the standard investor-program requirements. All loans must be for business purposes only and certified as such by the borrower. No property can be occupied by any borrower or guarantor, primary or secondary, and we reserve the right to decline any loan that suggests the property is not intended exclusively for business purposes. Named occupancy red flags include a borrower currently living rent free or renting their own primary residence, a subject property that could reasonably function as a second home, documents showing the subject as the borrower's current primary residence, and a subject property worth significantly more than the borrower's own primary residence. A family-tenant fact pattern will usually attract a closer look at those flags, not a lighter one.
A minimum FICO of 660 is required for all guarantors, with the middle score used to set rate and LTV where there is a single guarantor. Where there are multiple guarantors, rate and LTV follow the lowest middle score and every other guarantor must still clear 660.
An illustration, with invented figures
The numbers below are made up to show the mechanism. They are not a quote and not a rate sheet.
Say the property is a single-family rental. The appraiser's Form 1007 supports $2,000 of market rent. Your son lives there and pays $1,400 on a signed lease. PITIA on the proposed refinance comes to $1,750.
If the family lease counted at its face amount, the DSCR would be roughly 0.80. If the appraisal's market rent could be substituted, it would be roughly 1.14. Neither of those is the path. The lease is not an eligible lease, so it is not the qualifying document, and there is no below-market uplift provision that would substitute the $2,000 figure on a refinance.
What the borrower is actually deciding between is renting the unit to an eligible tenant and coming back with a conforming lease, or proceeding under the unleased treatment with a 5% LTV reduction and the constraint that a DSCR under 1.00 is not permitted on a vacant property. That is a genuine decision with real trade-offs, and it is much cheaper to make it before the appraisal is ordered than after.
Tax treatment is an accountant's question
Charging a relative below-market rent has tax consequences that are entirely separate from loan eligibility, and they can be significant. Whether the arrangement is treated as a rental activity at all, how deductions are handled, and whether any part of the discount is characterized as something other than rent are questions for your accountant. I am not going to answer them here, and a lender's guideline is not the right authority for them.
The same applies to landlord-tenant law, local rent regulation, and any lease language your state requires. Those go to your attorney and to your municipality.
What this page does not do
This page is not an approval, a pre-qualification, a rate quote or a commitment to lend. Nothing here reserves terms or LTV for your file.
It does not tell you whether a specific relationship outside the named categories, such as a cousin or an in-law, is inside or outside the tenant exclusion. The guideline uses open-ended language there and does not define "immediate family" for tenancy purposes, so that is a file-level question.
It does not resolve whether a unit occupied by a relative counts as occupied for the occupancy definition, or whether rental receipts paid by an ineligible tenant satisfy the proof-of-receipt requirement. Our program text does not address either point.
It does not cover the full receipts matrix for files without a lease, the cap that applies when a lease exceeds market rent, short-term rental qualification, portfolio structures, or state-specific overlays. It does not price your loan or set your reserve requirement, and it does not answer the tax, legal or zoning questions that a family tenancy can raise.
Guideline DSCR V28 · Reviewed August 31, 2026
Published September 1, 2026 · Updated September 1, 2026
How to use this guide
This article is educational guidance, not an offer or commitment to lend. Rules, property facts, credit, leverage, documentation, and full underwriting still control any actual scenario.