A refinance on a 1-4 unit investment property is a cash-out refinance when the borrower or guarantor receives net proceeds from the refinancing that exceed 10% of the loan amount. Below that line it is a rate-and-term refinance. Above it, the file is reclassified — and the reclassification is not a label change. It moves your maximum LTV, it caps how much money you can take, and on some files it imposes a DSCR floor that a rate-and-term loan would never have seen.
Almost nobody explains this before the borrower is three weeks into a file. The classification is not something a borrower elects on an application. It is computed at final underwriting, from the actual numbers, and the answer can arrive after the appraisal is paid for.
Two things in that sentence do the work. First, net proceeds as reflected on the underwriting model — not what the borrower asked for, but a computed figure on the final model. Second, 10% of the loan amount: not 10% of value, not 10% of equity. On a $400,000 loan the line sits at $40,000; on a $1,200,000 loan it sits at $120,000. A borrower financing a larger property has more room before the same dollar of cash reclassifies the file, which is exactly why people misjudge it.
The classification is computed, not declared
The loan purpose section says the same thing from the other direction, and it names where the number comes from.
"Based on the Final UW model/Memo" is the part borrowers miss. Loan purpose is an output of underwriting, not an input. You can submit a file labeled rate and term, get a rate-and-term quote, order the appraisal against a rate-and-term LTV, and still have the purpose flip when the final model is built and the net proceeds line lands at 10.4%.
That is the entire gap. The threshold is knowable at application. It is just rarely computed there.
What a rate-and-term loan amount is allowed to cover
The rate-and-term definition is narrow and it is a list. This is the single most useful paragraph in the guideline for anyone trying to stay on the right side of the line.
Four categories. That is the whole list.
| Use of the new loan amount | Inside the rate-and-term definition? |
|---|---|
| Payoff of the current first lien mortgage | Yes |
| Payoff of a purchase money second mortgage | Yes — purchase money is seasoned by definition |
| Payoff of a junior mortgage in place 12 months or more | Yes |
| Payoff of a junior mortgage in place less than 12 months and not purchase money | Not on the list |
| Closing costs on the new loan | Yes |
| Prepaid items | Yes |
| Payoff of a non-mortgage debt | Not on the list |
| Cash to the borrower | Not on the list |
Note what is not a problem. Rolling closing costs and prepaids into the loan does not, by itself, create a cash-out refinance. They are expressly inside the rate-and-term definition. Borrowers frequently assume the opposite and structure around a phantom rule. Financing your costs raises the loan amount, which raises LTV and can bump you into a lower row on the eligibility grid — but it does not change loan purpose.
What is a problem: the list contains no category for general debt. A junior lien that is neither purchase money nor twelve months old sits outside it, and so does anything that is not a mortgage.
The free-and-clear trap
This is the one that surprises the most people, because it has nothing to do with how much money changes hands.
There is no debt to refinance, so there is nothing for the new loan to be "rate and term" against. A borrower who paid cash for a rental eight months ago and now wants to place a first mortgage on it is taking a cash-out refinance, full stop — even if the proceeds sit untouched in the LLC account, even at a modest loan amount. The 10% test never enters the analysis. Inside six months of acquisition, a different section applies: see delayed financing below.
What actually changes when the file is reclassified
Maximum LTV drops
The DSCR eligibility grid runs purchase and rate-and-term refinance in one column and cash-out refinance in another. The spread is not cosmetic.
Standard DSCR eligibility, DSCR at or above 1.00, loan amounts up to $1,500,000:
| Minimum credit score | Units | Maximum loan amount | Purchase / rate-term max LTV | Cash-out max LTV |
|---|---|---|---|---|
| 700 | 1-4 | $1,500,000 | 80 | 75 |
| 700 | 1-4 | $2,000,000 | 75 | 70 |
| 680 | 1-4 | $1,500,000 | 80 | 70 |
| 680 | 1-4 | $2,000,000 | 70 | 65 |
| 660 | 1 | $1,500,000 | 75 | 65 |
| 660 | 1 | $2,000,000 | 65 | 60 |
At 700 FICO on a $1.5MM-or-under loan, reclassification costs five points of LTV; at 680 and at 660 it costs ten. On a $600,000 value, ten points is $60,000 of proceeds that stop existing the moment the purpose changes. The grid tightens again where DSCR is thin: for DSCR between 0.75 and 0.99, a 680-score borrower at a $2,000,000 loan amount sees 65 on purchase and rate-and-term against 55 on cash-out.
Portfolio (blanket) files carry their own grid, where purchase and rate-and-term are broken out separately:
At a 680 score the portfolio grid reads 80 purchase, 75 rate and term, 70 cash-out. At 660 on single-unit properties it reads 75, 75, 65.
The proceeds themselves get capped
Once you are on the cash-out side, how much you can take is bounded by where your LTV lands.
A borrower pulling equity out of a $2,000,000 portfolio at 70% LTV cannot exceed $1,000,000 in proceeds no matter how the appraisals come in. Dropping to 65% LTV or below removes the cap entirely, which is occasionally the cheapest way to solve a proceeds problem.
A DSCR floor appears in the 6-to-12-month ownership window
The standard grid permits DSCR between 0.75 and 0.99 at reduced LTVs. But if the property has been owned more than six months and less than a year and the file is cash-out, sub-1.00 coverage is off the table. A borrower with 0.92 coverage on a property bought nine months ago has a rate-and-term option and no cash-out option — reclassification does not just lower their LTV, it can end the loan.
Documentation obligations attach
The "must support and not conflict" clause is broader than it looks. It is not enough that the affidavit says the right thing; nothing else in the file may say otherwise. Bank statements, emails and contracts suggesting a consumer use of proceeds are a conflict.
Some debts cannot be paid with the proceeds at all
Read those two sentences together and the pincer is obvious. The derogatory items must be cleared by closing, and the loan's own cash-out proceeds are not an eligible source. The money has to come from somewhere else, documented.
Reserves — what is actually true
Common wisdom is wrong here. On the DSCR program, reserves are keyed to coverage, not to loan purpose: DSCR at or above 1.0 requires three months PITIA on the subject property, and DSCR below 1.0 requires six months. Short-term rentals carry an additional six months; portfolio files add six months (nine total) on vacant transactions. Reclassifying a file from rate and term to cash-out does not, on its own, raise the reserve requirement. What the purpose does change is a source question, in the borrower's favor:
So a strong-credit cash-out borrower can self-fund reserves out of the transaction. A rate-and-term borrower producing no proceeds cannot.
Delayed financing: treated as rate and term, modeled as cash-out
There is one structure that sits deliberately across the line, and it is the reason you may see "cash-out" on an internal document while being quoted rate-and-term pricing.
This is the cash buyer's path back to leverage, and the constraints are strict: within six months of purchase, no financing used to buy, arm's length, no liens on title, and a loan amount capped at what you actually paid plus acquisition closing costs. Meet all of it and the transaction prices as rate and term even though the underwriting model labels it cash-out. Miss the six-month window on a free-and-clear property and you are back to the rule above.
Other reductions stack on top
Reclassification is rarely the only adjustment. LTV on refinances is reduced by 5% for vacant properties as defined in the occupancy section — a reduction that does not apply to purchases. LTV is reduced by 10% for non-warrantable condominiums, with a maximum of 70% LTV/LTC. Standard and cross-collateralized transactions using short-term rental income to qualify are capped at 60% LTV, and an inexperienced investor is capped at 75% LTV/LTC. A vacant single-family cash-out at a 680 score starts at 70 and comes down from there.
The commercial equivalent
On commercial small-balance files the 10% threshold survives, but the surrounding machinery differs. The threshold itself is stated the same way:
Three differences matter.
The commercial guideline states permitted uses affirmatively — capital expenditures to the property, business or property related debt, and normal business expenses. The DSCR guideline says "business purposes only" without enumerating categories.
Reserves do not vary by purpose on the commercial program. Six months of liquid reserves, measured in months of the qualifying principal-and-interest payment on the subject property, for purchase, rate-and-term refinance and cash-out refinance alike. Cash-out proceeds may be used for reserves if FICO is greater than 700, provided the proceeds equal or exceed the required six months.
Seasoning bites for a full twelve months, not six. For commercial cash-out refinances, LTV may be constrained by seasoning when ownership is under 12 months. If the property was purchased or owned before the loan application, the borrower must provide the settlement statement and evidence of 15-20% capital investment at acquisition, plus satisfactory evidence of capital expenditure on the subject property to support the value increase — expenditure that cannot be financed and is subject to review of paid invoices. In those cases appraised value may be used to determine LTV. Cash-out may be limited, case by case, to the initial capital expenditure plus closing costs, regardless of the timeline.
| DSCR (1-4 unit investor) | Commercial (SBC) | |
|---|---|---|
| Reclassification threshold | Net proceeds exceeding 10% of loan amount | Greater than 10% cash-out per final UW model/memo |
| Itemized rate-and-term payoff list | Yes — first lien, seasoned junior liens, closing costs, prepaids | Not stated in the guideline |
| Free-and-clear property = cash-out | Yes, if acquired more than 6 months before disbursement | Not stated in these terms |
| Cash-out seasoning drag | LTV basis shifts at 3 and 6 months of ownership | LTV may be constrained under 12 months of ownership |
| Reserves by purpose | Keyed to DSCR (3 or 6 months PITIA), not purpose | 6 months for purchase, rate-term and cash-out alike |
| Published max LTV grid | In the guideline, split by purpose | Set forth in the current Pricing Matrix |
Two commercial-only items touch loan purpose directly. Inherited property is eligible for a rate-and-term refinance; cash-out may be considered by exception, with possible LTV restrictions, and the transaction must have cleared probate and be vested in the borrower's name. And on a no-consideration transfer of ownership, credit and background reports may be required for all prior vested owners, with LTV or cash-out proceeds reduced accordingly.
How to keep a file on the rate-and-term side
Practical, in order of how often it works.
1. Compute the threshold at application. Take 10% of the expected loan amount. That is your entire cushion beyond the eligible payoffs, closing costs and prepaids.
2. Check the age of every junior lien. Purchase money is fine at any age. Anything else needs twelve months in place.
3. Confirm the property is not free and clear. If it is and you closed more than six months ago, the classification is already decided; inside six months, test delayed financing, which is the only structure that gets rate-and-term pricing on a no-debt payoff.
4. Reduce the loan amount rather than argue the label. Net proceeds are measured against the loan amount, and the loan amount is the variable you control.
5. If cash-out is unavoidable, check the 65% line. Above it, proceeds cap at $1,000,000. At or below it, proceeds are unlimited.
What this page does not do
This page reads the loan purpose, rate-and-term, cash-out, delayed financing and reserves sections of The Fiirm's DSCR and SBC program guidelines. It does not price a loan and it does not approve one. Specifically, it does not tell you:
- What the rate difference is. Neither guideline publishes a pricing adjustment for cash-out. What is published is the LTV separation in the eligibility grid; the rate itself comes from the pricing matrix in effect at final underwriting.
- Which line items the underwriting model counts as net proceeds. The definition says "as reflected on the Underwriting model." It does not itemize the calculation, and this page will not guess at it.
- Whether there is a de minimis or incidental carve-out. The guidelines contain no dollar floor, no rounding tolerance, and no "incidental proceeds" exception below the 10% line. The test as written is the test.
- How a file is re-quoted after reclassification. The guidelines define the classification. They do not describe a redisclosure or re-approval process, whether reducing the loan amount late in the file cures a purpose change, or what exception authority exists.
- Anything about owner-occupied or consumer-purpose financing. Both programs are business-purpose only. On the DSCR program no property may be occupied by any borrower or guarantor, primary or secondary, and The Fiirm reserves the right to decline any loan that may indicate the property is not intended exclusively for business purposes.
Every figure above is quoted from The Fiirm DSCR program guidelines, v28 effective 5/1/2026, except where attributed to The Fiirm SBC program guidelines, effective 8/3/2026. Guidelines change; confirm against the version in effect on your file.
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.