If you bought a rental, put money into it, and now want to refinance out of your acquisition debt, one question decides your loan amount: does the lender use the new appraised value, or hold you to what you paid? On The Fiirm's DSCR program — our 1-4 unit residential investor loan — the answer turns on how long you have owned the property and whether your cost basis is at least 120% of the purchase price.
Here is the short version.
If you have owned the property more than six months, the appraised value is used. The cost-basis test does not apply to you.
If you have owned it three to six months, the default is the lower of cost basis or appraised value — the outcome that hurts BRRRR files. There is a release valve: if your cost basis is at least 120% of the purchase price, the appraised value can be used to calculate LTV, with the loan amount then capped at the cost basis figure.
That last sentence is the whole article. The rest of this page is what actually goes into "cost basis," what does not, and how the arithmetic resolves on a file shaped like yours.
Why this rule exists and why the answer you found online is wrong
Search this question and you get two kinds of bad answers. The first is owner-occupied residential guidance — conforming delayed financing, twelve-month seasoning conventions, agency cash-out rules. Different rulebook; it does not govern a DSCR loan. The second is forum folklore: "everyone seasons six months," "you can always use ARV after ninety days." Directionally shaped like the truth, and wrong in the ways that cost money.
A DSCR loan is underwritten on the property, not on your tax returns. The protection against a manufactured value is a seasoning-and-basis framework rather than an income file. That is why this test exists.
What counts as cost basis
Cost basis is not "what I paid." It is a defined build-up, and every line has to be documented.
Three qualifiers inside that definition do real work.
"Borrower paid" and "expended to date." Money that has left your account, for work already performed — not a contractor's estimate or the balance of a budget you intend to spend after closing.
"Customary" and "arms-length." Costs paid to your own affiliate, or outsized for the market, are not automatically in.
"In connection with and at the time of the acquisition." The closing-cost bucket is anchored to the purchase, not to carrying the property afterward.
And two explicit limits:
- Assignment fees greater than 10% of the purchase price will not be considered. (This provision does not apply on purchase transactions.)
- Mortgage broker fees, origination fees, points, and similar items are excluded.
There is a fallback for the undocumented case: if closing costs are not documented or clearly verifiable at the time of closing, then up to 2% of the purchase price may be added to the purchase price for the assessment of cost basis. That is a floor for a sloppy file, not a target. On a $200,000 purchase, 2% is $4,000 — if your real closing costs were $9,000, proving it is worth $5,000 of basis.
| Line item | In cost basis? | Note |
|---|---|---|
| Purchase price | Yes | The anchor |
| Borrower-paid CAPEX, expended to date | Yes | Paid invoices may be required |
| Non-CAPEX rehab spending | No | See the CAPEX definition below |
| Title, escrow, closing costs | Yes | Customary, arms-length, at acquisition |
| Real estate broker commissions | Yes | Named in the definition |
| Taxes, HOA dues, fees, assessments, liens paid at acquisition | Yes | Named in the definition |
| Assignment fees | Yes, up to a limit | Not considered above 10% of purchase price |
| Mortgage broker fees, origination fees, points | No | Expressly excluded |
| Undocumented closing costs | Partially | Up to 2% of purchase price may be added |
CAPEX versus everything else
This is where BRRRR files leak basis, and it is the single most useful paragraph in the guideline for a rehabber.
Read the exclusion list again, because it is the first month of most rehabs. Demolition. Debris hauling. Fixing lights and outlets. Pulling carpet. That is make-ready work, and it does not build cost basis under this definition.
How your contractor writes the invoice matters. A single line reading "renovation — $47,000" gives an underwriter nothing to work with. Line-itemized invoices separating roof, HVAC, and systems work from demo and debris let the CAPEX portion be counted.
The three ownership windows
Ownership length is measured to the note date, not the application date. That matters near a threshold, because the note date moves as the file moves.
| Ownership at note date | How value is determined on a rate/term refinance |
|---|---|
| Owned ≥ 3 months to ≤ 6 months | Lower of cost basis or appraised value — unless cost basis ≥ 120% of purchase price, in which case appraised value may be used for LTV, with the loan amount capped at cost basis |
| Owned > 6 months | Use appraised value |
The guideline's rate/term LTV restrictions address ownership of three months or more. It states no separate rule for a property owned less than three months, so I will not invent one — that is a call on the specific file, not a published number.
The 120% test, and a wording trap
The rule reads: "If Cost Basis exceeds the purchase price by ≥ 120% then the appraised value can be used to calculate the LTV but the total loan amount will be limited to no more than the Cost Basis."
Read strictly, "exceeds the purchase price by 120%" would mean cost basis of 220% of purchase price. That is not how the guideline applies it. Its own worked example computes the test as a straight ratio — cost basis divided by purchase price — and calls 153% a pass. So the operative test is:
Cost basis ÷ purchase price ≥ 120%.
Which means you have spent, in documented and countable dollars, at least 20% of the purchase price on top of the purchase price.
The guideline's own worked example
The following numbers and the arithmetic around them come from the guideline itself, in the Rate/Term Refinance Transactions section. It is labeled there as illustrative.
Assumptions:
- Purchase price: $200,000
- As-is appraised value: $500,000
- Closing costs: $4,000
- Paid and documented renovations: $102,000
Step 1 — Build the cost basis.
$200,000 (purchase price) + $4,000 (closing costs) + $102,000 (documented renovations) = $306,000
Step 2 — Run the 120% test.
$306,000 ÷ $200,000 = 153%. That is at or above 120%, so the test passes and the current appraised value may be used to calculate maximum LTV.
Step 3 — Apply the LTV to the appraised value.
Assuming a maximum allowable LTV of 80%: 80% × $500,000 = $400,000.
Step 4 — Apply the cost-basis cap.
Because the loan amount is limited to no more than cost basis, the maximum loan is $306,000, not $400,000.
That fourth step is the part investors miss. Passing the 120% test does not hand you the appraised value as a loan amount. It changes which value the LTV percentage applies to, then a hard ceiling equal to your documented cost basis lands on top. Here the cap binds — $306,000 is well below the $400,000 the LTV alone would allow.
A file that fails the test
The following is my illustration, not the guideline's, built to show what a near-miss costs. Assume a single-family rental purchased four months ago, refinancing rate-and-term.
- Purchase price: $180,000
- Documented closing costs at acquisition: $3,600
- Rehab spend, total: $17,000, of which:
- New HVAC and roof repair (CAPEX): $12,000
- Demolition, debris removal, carpet removal, outlet and fixture repair (not CAPEX): $5,000
- As-is appraised value: $240,000
Step 1 — Cost basis. $180,000 + $3,600 + $12,000 = $195,600. The $5,000 of non-CAPEX work does not build basis.
Step 2 — The test. $195,600 ÷ $180,000 = 108.7%. Below 120%. The test fails.
Step 3 — Value used. Lower of cost basis ($195,600) or appraised value ($240,000) = $195,600.
Step 4 — Maximum loan. At an 80% maximum LTV: 80% × $195,600 = $156,480.
Had the test passed, the calculation would have run against the $240,000 appraisal: 80% × $240,000 = $192,000, then capped at cost basis of $195,600 — so $192,000. The near-miss costs roughly $35,500 of loan proceeds on a file where the borrower genuinely spent $17,000.
Two things would have changed that outcome: waiting until the property crossed six months of ownership, at which point appraised value is used outright; or documenting more countable basis — the acquisition-side taxes, HOA items, and liens named in the definition, plus any CAPEX invoices sitting uncollected.
The other ceiling on a rate/term refinance
Even when the cost-basis math is favorable, a rate-and-term refinance has a structural limit that has nothing to do with value.
So on a rate/term you are retiring existing debt, not pulling rehab capital back out. If the goal is to recover the cash you put in, you are describing a cash-out refinance, and it is priced and limited as one.
The definitional line: a cash-out transaction is one that refinances existing debt and in which the borrower or guarantor receives net proceeds, as reflected on the underwriting model, exceeding 10% of the loan amount. Financing of a property owned free and clear and acquired more than six months prior to the new loan disbursement date is also treated as cash-out.
The cost-basis and 120% rules read the same way in the cash-out section — same three-to-six-month window, same release valve, same cap, and it points back to the rate/term example for the calculation. What changes is the LTV grid and added conditions, including a minimum DSCR of 1.00x for cash-out on properties owned more than six months and less than one year.
Maximum LTV on a rate/term refinance
The cost-basis test decides which value the percentage applies to. The percentage itself comes from the eligibility grid. For standard DSCR loans with DSCR ≥ 1.00:
| Minimum credit score | Units | Maximum loan amount | Max LTV, purchase / rate-term |
|---|---|---|---|
| 700 | 1-4 | $1,500,000 | 80% |
| 700 | 1-4 | $2,000,000 | 75% |
| 680 | 1-4 | $1,500,000 | 80% |
| 680 | 1-4 | $2,000,000 | 70% |
| 660 | 1 | $1,500,000 | 75% |
| 660 | 1 | $2,000,000 | 65% |
The grid carries LTV reductions for specific characteristics — unleased long-term rentals, short-term rentals, non-warrantable condos. The one most likely to bite a BRRRR file: an unleased (vacant) long-term rental takes a 5% LTV reduction from the grid maximum on any refinance transaction, and does not apply to purchases. Finish the rehab without placing a tenant and you refinance five points lower than you modeled — and the unit still has to be in lease-ready condition.
Portfolio and blanket loans
If you are refinancing several properties into one loan, the test is applied on an averaged basis rather than property by property.
Note what this does not say. The blanket rule is written around the six-month average and does not restate the 120% release valve. Read literally, on a blanket where average ownership is under six months, all properties go to the lower of cost basis or appraised value — and adding one seasoned property to the pool can move the average across six months for the whole loan.
Adjacent rules that catch BRRRR files
Delayed financing. A separate lane for a property bought with cash: purchased within six months of the loan approval or note date, a settlement statement showing no financing was obtained, a prior arm's-length transaction, preliminary title showing the borrower as owner with no liens, investment 1-4 unit, not occupied by the borrower, guarantor, or immediate family. It is treated as a rate-and-term refinance for pricing. The controlling limit: the loan amount cannot exceed purchase price and closing costs paid when the property was acquired. This lane does not add renovation spending to the ceiling — if your value came from the rehab, delayed financing is not the path.
Appraisal age. The appraisal report is good for 90 days. On a slow rehab-to-refinance timeline, an appraisal ordered too early expires before the file closes.
Sweat equity. The guideline lists sweat equity — labor and materials used to improve the property — under Ineligible Assets, alongside rent credits and interested-party contributions. The cost-basis definition separately requires borrower-paid costs, with paid invoices potentially required. Unbilled labor does not produce a paid invoice.
Listed for sale. If the property was listed within six months of the note date, it is acceptable only with documentation showing the listing was cancelled, an acceptable letter of explanation, and a minimum prepayment penalty of two or more years — and the value will be based on the lesser of the lowest list price or appraised value. An investor who tested the retail market before deciding to hold can be capped by their own old list price.
Property flips. The flip provisions are written around the purchase side — they test the price in the borrower's purchase agreement against the seller's acquisition price and timing (more than 10% above if the seller owned it 90 or fewer days; more than 20% above if 91-180 days). Where they apply, a second appraisal is required and value increases must be documented with appraiser commentary and recent comparable sales.
The practical sequence
1. Fix your note-date ownership length first. Past six months, none of this applies and appraised value governs.
2. Between three and six months, total your countable cost basis: purchase price, documented acquisition closing costs, and CAPEX only.
3. Divide by purchase price. At 120% or above, appraised value may be used for LTV.
4. Apply the grid LTV — less any reduction, including 5% for a vacant long-term rental.
5. Cap the result at cost basis.
6. Then check the rate/term structural limit: payoff of the first lien, seasoned non-first liens, closing costs, and prepaids. If you need more than that, you are in a cash-out transaction.
What this page does not do
This page explains one test inside The Fiirm's DSCR program for 1-4 unit investor properties. It does not price your loan, and it does not approve one.
It does not cover the full DSCR calculation, reserves, entity and guarantor eligibility, prepayment structures, property condition standards, or the short-term rental and non-warrantable condo overlays — each of which can change the outcome on a real file.
Where the guideline is silent, this page says so rather than filling the gap. It does not state a rate/term rule for a property owned under three months, because the guideline's LTV restrictions address ownership of three months or more. It does not restate the 120% release valve for blanket loans, because the portfolio provision does not include it. It does not tell you how a specific invoice will be classified as CAPEX or non-CAPEX; the guideline gives examples on both sides and paid invoices may be required, and the classification of anything not on those lists is an underwriting judgment on your documents.
Rules and grids cited here are from The Fiirm DSCR program guidelines, v28 effective 5/1/2026. Guidelines change. Confirm the current version before you commit capital to a rehab budget on the strength of a cost-basis calculation.
Guideline DSCR V28 · Reviewed August 31, 2026
Published August 31, 2026 · Updated August 31, 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.