Financing real estate investments can be complex, especially when dealing with leasehold properties—a form of ownership where investors lease the land from a separate entity but own the structure or improvements on it. These arrangements are common in coastal cities, resort communities, and urban redevelopment zones. While many traditional lenders are hesitant to finance leasehold interests, DSCR loans (Debt Service Coverage Ratio loans) offer a viable and flexible financing solution based on property income rather than personal income or land ownership.
This article explores how DSCR loans work for leasehold properties, the challenges and benefits of ground lease financing, and how investors can qualify for these specialized real estate deals.
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A leasehold property is real estate where the land is leased from a separate landowner (often a government, trust, or institutional entity), but the investor or developer owns the structure or improvements on the land.
Leasehold properties are common in areas such as:
A DSCR loan is a type of non-QM (non-qualified mortgage) that qualifies borrowers based on a property’s net operating income (NOI) instead of their personal income. This makes DSCR loans ideal for investors, self-employed borrowers, and LLCs.
DSCR = Net Operating Income / Annual Debt Service
If a leasehold property generates $100,000 in NOI annually and has $80,000 in annual mortgage payments:
DSCR = $100,000 ÷ $80,000 = 1.25
Most DSCR lenders require a minimum DSCR of 1.20 to 1.30 for approval.
Traditional banks are often reluctant to finance leasehold properties due to concerns over land ownership, limited collateral, and reversion risk. DSCR lenders, however, take a more cash-flow-oriented approach, making them well-suited for leasehold financing when the property is income-producing.
| Loan Feature | Typical Range |
|---|---|
| Minimum DSCR | 1.20 – 1.30 |
| Maximum LTV (Loan-to-Value) | 65% – 75% of leasehold interest (not land value) |
| Credit Score Requirement | 660+ (700+ preferred for best rates) |
| Loan Amount Range | $150,000 – $5,000,000+ |
| Loan Term Options | 30-year fixed, 5/6 ARM, or interest-only options |
| Lease Term Requirement | Minimum 30 years remaining on ground lease |
| Prepayment Penalty | 3–5 year step-down or flat |
| Reserve Requirements | 6–12 months of PITIA |
Important: Most lenders require at least 30 years remaining on the ground lease beyond the loan term to approve financing.
Lenders assess the same factors as with fee-simple DSCR loans, but with added scrutiny on lease terms and land ownership.
| Challenge | Solution |
|---|---|
| Lease term shorter than loan term | Look for properties with renewable leases or negotiate lease extension |
| Variable ground rent increases | Document future rent caps and build into pro forma |
| HOA or lease restrictions on rental use | Ensure the lease allows both short- and long-term rental operation |
| Appraisal undervalues leasehold interest | Provide market comps and rental income history to justify valuation |
Leasehold properties can offer attractive cash flow, lower acquisition costs, and access to high-demand locations—but financing them can be tricky. Fortunately, DSCR loans provide a flexible, income-based solution for real estate investors navigating the complexities of ground lease ownership.
By focusing on property performance rather than land value or personal income, DSCR lenders open the door to financing unique investment opportunities that would otherwise be inaccessible with traditional loans.
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Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
