A lease with a term of three years or longer makes a 1-4 unit investor property ineligible under our DSCR program. It is not a pricing hit or an LTV reduction — it is a flat no, and it sits in the same short bullet list as the requirement that your tenant be a natural person and not a member of your family.
Owners are routinely blindsided by this, and understandably. Everywhere else in real estate a long lease reads as strength: five years with a good tenant sounds like five years of proven income. On small residential investment property the opposite is true. Below: the rule, the provisions it sits next to, what the program does accept, why commercial property treats the same facts in the exact opposite way, and what to do if the lease is already signed.
The rule itself is one line
The lease term limit is a single bullet in the Lease Requirements section of the DSCR guideline. It has no preamble, no exception language, and no stated rationale.
Two things are worth knowing about that line. It is a recent addition — the guideline's own change log records it being added to Lease Requirements on 06/13/2024. And it is written without qualification. Other provisions in the same section carry hedges: the requirement that all tenants be natural persons is immediately followed by "exceptions for other types of entities may be considered on a case by case basis." The term limit has no such sentence attached.
That matters when you are deciding whether to submit a file and hope. Where the guideline wants to leave a door open, it says so in the same breath. Here it did not.
The term limit is not the only thing your lease has to clear
Before the length of the lease becomes the issue, the lease has to be the right kind of document with the right kind of tenant on it. The Lease Requirements section is short, and every item in it is a gate.
The lease must be fully executed by both an eligible tenant and the borrower or guarantor as landlord. An eligible tenant is defined as any party other than the borrower or guarantor, any affiliate, any officer, director, executive employee or manager of the borrowing entity, and any family member — spouse, siblings, ancestors, lineal descendants — of any of those people or entities. Separately and redundantly, the guideline states that no borrower, guarantor, owner of the borrowing entity, or their immediate family members may be a lessee. The point is made twice because it is the provision most often tested.
The lease must be in the name of the borrower or guarantor, or their verified property manager, as landlord. It must be on a form customary to the area the property is in and comply with all applicable legal requirements in all material respects, including required disclosures. It must cover 100% of the square footage of the residential unit. All tenants on leases must be natural persons, with entity tenants considered only case by case.
And this one, which does real work in a long-lease conversation: the lease must have a unit rental rate, and terms, consistent with the rates and terms prevailing in the local market where the property is located.
Read that provision carefully. It is not only about rent. It says terms as well as rate. In most residential rental markets in the United States, the prevailing term for a single-family or small multi-family rental is twelve months. A five-year residential lease is not the local market convention almost anywhere. So a long lease can fail on two independent grounds at once — the explicit term prohibition, and the market-consistency provision — and if the rent under it has fallen behind the market, that is a third.
Two related structures are excluded outright rather than by term. Rent-to-own arrangements and contracts for deed are ineligible, and "leasing with purchase option" properties appear in the ineligible property types list. If your lease contains a purchase option, the term limit is not your first problem; that ground is covered separately in [rent-to-own tenants and rental property financing](/blog/rent-to-own-tenants-and-rental-property-financing).
What the program does accept
The term limit is the top edge of a window. The program is not indifferent to lease length in either direction — it penalizes leases that are too short and prohibits leases that are too long, and the treatments are not symmetric.
| Lease situation | How the program treats it |
|---|---|
| Annual lease, market rate, eligible tenant | Standard treatment; rent used per the gross rent rules |
| Lease with a term of 3 years or more | Ineligible |
| Month-to-month lease (original or new) | Limited to 60% LTV |
| Short-term lease under 12 months, property not listed on any short-term rental site | Limited to 60% LTV; rental history not required |
| Expired lease containing month-to-month language | Allowed; no rental receipts required |
| Expired lease, no month-to-month language or extension | 3 months of rental receipts required |
| No lease available | 3 months proof of rental receipt required |
| Unleased or vacant long-term rental | 5% LTV reduction on refinance transactions; the reduction does not apply to purchases |
The short end is priced. The long end is closed. That asymmetry is the whole story of this rule, and it is visible in the LTV ceilings the guideline attaches to loose lease structures.
The appraisal section points the same direction: market rent estimates must be based on an annual lease for residential purposes, and short-term or specialized-use rental rates are not acceptable as market rent. The valuation machinery the program relies on is built around a one-year residential lease. Even student-share arrangements, permitted under conditions, must be on annual leases with the same start and end date, plus a parent guarantee, a college or university within five miles, and a 5% LTV reduction.
Holdover and expiration are their own subject with their own rules, and they are covered in [expired lease DSCR refinance requirements](/blog/expired-lease-dscr-refinance-requirements).
The guideline does not explain the limit. Here is our reading, labeled as ours.
This is the honest part. The DSCR guideline states the three-year prohibition and stops. It gives no rationale, no policy note, and no cross-reference. Anything you read below about why is our explanation, not the guideline's, and you should weigh it accordingly.
Our reading is that the limit is a collateral rule wearing the costume of an income rule.
A residential lease runs with the property. If the property is sold, or taken back by a lender through foreclosure, a tenant with three or five years left on a signed lease generally stays, at the rent stated in that lease, for the remainder of the term. Whoever ends up holding the property inherits the landlord's side of a contract they did not negotiate.
For a lender, that changes what the collateral is. A 1-4 unit residential property is valued and marketed primarily against owner-occupant and small-investor demand. Its liquidity comes from the fact that it can be repositioned quickly — re-rented at market, or delivered vacant to a buyer who wants to live in it. A long lease removes both options for the length of its term. If the rent under that lease is below market, it also removes income the new owner would otherwise capture, and the gap compounds every year the lease still has to run.
Add the small residential structure to that. There is one unit, or a handful — no other tenant to offset a bad one, no rollover schedule to average across, no professional lease administration behind the document. The lease is usually a two-page local form, not a negotiated instrument with estoppel rights and landlord protections. The concentration is total.
So a five-year residential lease is, in this view, a five-year encumbrance on the flexibility of the collateral, signed by a landlord whose interests stop mattering the moment the loan goes bad. A twelve-month lease that renews is nearly the same income with almost none of that exposure. That is why we read the rule as being about what the property is worth to whoever takes it back, not about whether the rent gets paid.
Again: that is our reading. The guideline says only that leases with a term of three or more years are not permitted.
The second cost: a long below-market lease also drags the DSCR
Even setting eligibility aside, a long lease at a stale rent hurts you twice, because of how qualifying rent is determined.
Gross rent used in the DSCR calculation comes from the lesser of the lease agreement or Appraisal Form 1007, with one narrow exception in the other direction. When the lease is higher than the appraiser's market rent, the amount used for qualifying cannot exceed 10% over market rent; if the actual rent is above market but within that 10%, the lease amount can be used. The guideline's own worked example: a lease at $1,200 against market rent of $1,000 qualifies at $1,100, while a lease at $1,050 against market rent of $1,000 qualifies at the full $1,050.
An above-market lease is capped at 10% over market. A below-market lease is not cushioned at all, because the rule takes the lesser of the two. A long lease is precisely the instrument most likely to be below market, since it fixes a rent set years ago against a market that has moved — so the same document that makes the file ineligible on term would also have suppressed the qualifying rent if it were eligible.
Commercial property treats the same fact pattern the opposite way
This is where owner intuition comes from, and it is not wrong — it is just imported from the wrong asset class.
On small balance commercial property, lease length is an underwriting input rather than a disqualifier, and a long lease can be an asset in the literal sense. Our SBC guideline's investor property review states that, in addition to the standard underwriting analysis, investor properties are evaluated on the overall quality and stability of the property's cash flow, with underwriting considering tenant financial strength, tenant tenure, historical occupancy, lease rollover risk, rental payment history, lease structure, and the quality of property management.
Read that list against the DSCR rule. Tenant tenure is a factor to be weighed. Lease rollover risk — the risk that leases expire and are not renewed — is something underwriting looks at, which means short remaining terms are the exposure, not long ones.
The clearest illustration is net-leased restaurant collateral. For NNN lease situations involving national credit tenants, valuation is based on the real estate rather than the NNN lease income stream, unless the remaining lease period, excluding options, extends five years past loan maturity. The commercial program gives valuation credit to a lease's income stream only if that lease runs at least five years beyond the end of the loan. A lease length that ends a 1-4 unit investor file is the precise condition on which a commercial file earns better treatment.
The commercial documentation set reflects the same posture: executed leases with all current addendums are required for commercial tenants, a current rent roll is required for investor properties, and the guideline's glossary carries the full apparatus of commercial leasing — estoppel certificates, extension options, escalations, lease buyouts, gross versus net lease structures.
If you have already signed one
Start by reading the actual document rather than describing it from memory. The term is the operative fact, and it is often not what the owner remembers.
Confirm the stated term. Three years is the threshold, and the guideline's language is "3+ years." A lease written for two years is a different document from a lease written for three, and the difference is eligibility.
Check whether the length comes from the term or from renewals. A twelve-month lease that has automatically renewed twice is not the same instrument as a signed thirty-six-month lease, even though the tenant has been in place the same time. Bring the original lease and every addendum.
Check the rent against the market. If the rent has fallen materially behind, that is a separate problem from the term, and one that will follow the property into the DSCR calculation regardless.
Look at the calendar. A long lease nearly over is a different negotiation from one with four years left — though the guideline gives you no mechanism here, and no carve-out for a lease that is 3+ years by term but nearly expired.
Talk to your attorney before you talk to your tenant. Whether a signed lease can be shortened, terminated, replaced or bought out, on what terms and with what notice, is a legal question governed by your lease and your state and local landlord-tenant law. Route it to counsel.
And do not paper over it. Re-executing a lease to look shorter than the arrangement actually is misrepresents the file, and a document manufactured for a loan file fails the execution, landlord-name, square-footage and customary-form requirements before anyone reaches the term.
Where the guideline is silent
It gives no reasoning for the three-year limit. The rule appears as one bullet with no rationale; everything in this article under "here is our reading" is ours.
It does not address renewal options in the DSCR context. The commercial guideline is explicit that its five-year NNN test measures the remaining lease period "without options." The DSCR Lease Requirements section says nothing about whether options to extend count toward the three-year term. We are not going to invent an answer.
It does not say when the term is measured — at lease commencement, at application, or as remaining term at closing. It says leases with a term of 3+ years are not permitted, and stops.
It provides no cure mechanism. There is no stated process for amending, shortening, terminating or buying out a long lease to bring a file into eligibility, and no exception language attached to this bullet, unlike the natural-persons provision immediately above it which does allow case-by-case consideration.
It does not price the rule. There is no LTV reduction, reserve add, or rate adjustment offered as an alternative to eligibility, the way there is for month-to-month leases, short-term leases and vacancy.
Where the guideline is silent, we will tell you it is silent rather than fill the gap with something plausible.
What this page does not do
This page explains one eligibility provision in the 1-4 unit investor program and the reasoning we attach to it. It is not an approval, not a pre-qualification, not a quote, and not a commitment to lend. Nothing here reserves terms or pricing.
It does not evaluate your file. Whether a specific lease is eligible depends on the executed document, the appraisal, the tenant, the property and the transaction, and that determination is made in underwriting on the whole file.
It does not cover the rest of the program. Minimum FICO for the 1-4 unit investor program is 660, and credit, reserves, LTV grids, experience requirements, property type eligibility, prepayment structure and portfolio treatment all have their own requirements this page does not address.
It does not cover commercial lease underwriting. The small balance commercial material here is used only for contrast; commercial files are underwritten under a separate guideline with its own eligibility, and 1-4 unit properties are expressly excluded from it.
It does not give legal advice. Whether you can shorten, terminate, assign or renegotiate a signed lease, what notice is required, and what your tenant's rights are under state and local law are questions for your attorney. Tax treatment is for your accountant. Zoning, permitting and code questions are for your municipality.
And it does not substitute for reading your own lease. The term written on that document is the fact that decides this.
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.