When a property is leased, two rent figures exist: what the tenant actually pays and what an appraiser thinks the market supports. Which one your lender uses can change your coverage ratio meaningfully in either direction.
These questions cover the interaction between the two.
Quick answer
Many lenders use the lower of your signed lease or the appraiser's market rent, which protects them from above-market leases. Some accept a documented lease with payment history. The policy varies and is worth confirming before you apply.
Frequently Asked Questions
Which is better for me, lease or market rent?
Whichever is higher, though under a lower-of policy you get the lesser figure. If your lease is above market, market rent applies; if below, your lease applies.
Why do lenders use the lower of the two?
It protects against above-market leases that may not renew at the same rent — for example a lease to a related party or one signed at a market peak.
Do all lenders use the lower-of approach?
No. Some accept a documented lease supported by payment history even when it exceeds the appraiser's opinion. This is one of the more variable overlays.
What if my lease is significantly above market?
Expect the market figure to govern at most lenders. If the gap is large, be prepared for a lower ratio than your actual income suggests.
What if my lease is below market?
Under a lower-of policy your lease is used, reducing your ratio. Investors sometimes wait to raise rent to market before refinancing for this reason.
Can I raise the rent before applying?
If the lease term allows and market supports it, yes — though the increase generally needs to be documented and in effect rather than planned.
How long does a new lease need to be in place?
Practices vary. Some lenders accept a recently signed lease; others want payment history. A lease signed days before application may receive scrutiny.
Does a related-party lease count?
It receives additional scrutiny since it is not arms-length. Some lenders discount or disregard it in favor of market rent. Disclose the relationship upfront.
What about a lease with a family member?
Same treatment as any related-party arrangement — expect scrutiny and possibly market rent substitution. Be transparent about it.
Does a longer lease term help?
It can support stability, though the rent figure matters more than the term. Some lenders view a long lease at below-market rent unfavorably since it locks in the lower income.
What if a tenant is paying late or partially?
Payment history is reviewed where lenders consider actual rent. Inconsistent payments weaken the case for using lease rent over market rent.
How does this differ on multi-unit properties?
The same comparison applies per unit, so the effect compounds. Three units at modest differences can meaningfully change the combined figure.
Should I provide leases even if market rent is higher?
Generally yes. Transparency is better than omission, and underwriting typically discovers occupancy through the appraisal regardless.
Can I use projected rent after a planned increase?
No. Underwriting uses current documented rent or current market rent, not planned increases.
Does the lease type matter?
Standard residential leases are straightforward. Unusual arrangements — rent-to-own, lease-option, corporate housing — may be treated differently.
What about a property under a master lease?
Master lease arrangements receive specific scrutiny, since the structure differs from a direct tenant relationship. Disclose it early.
How does this affect timing a purchase?
If you are buying a property with below-market leases in place, model your ratio at the actual lease rent rather than market, since that is likely what applies.
Can I renegotiate leases before closing?
Sometimes, though changing leases mid-transaction can complicate underwriting. Discuss with your lender before making changes.
What is the safest planning assumption?
Model at the lower of your lease and a conservative market estimate. If the deal works on that basis, you have margin regardless of which policy applies.
What should I ask the lender?
Whether they use lease rent, market rent, or the lower of the two — and what documentation would support using the lease if it is higher.
