75% LTV or 1.25 DSCR, Whichever Is Lower: How Your Refi Lender's Cap Should Set Your BRRRR Purchase Price

Two Caps on Your Refi Loan, and Only One of Them Matters

Picture a rental with a $200,000 ARV and a $40,000 rehab. You buy it for $100,000, which passes the 70% rule exactly ($200,000 x 0.70 minus $40,000). You plan on a 75% cash-out refi of $150,000 to pull your money back out. Then the lender's term sheet comes back at roughly $137,000, and about $13,000 you expected to recover stays stuck in the deal.

The appraisal didn't fail you. DSCR lenders size a cash-out refi with two separate tests and lend the lower of the two. The first is loan-to-value, often 75% of the appraised value. The second is the debt service coverage ratio, which asks whether the property's rent covers its payment with room to spare.

The formula is simple: DSCR = monthly market rent / monthly PITIA (principal, interest, taxes, insurance, and any HOA dues). Many lenders require a minimum of 1.20 to 1.25 for their best pricing. Say the house rents for $1,750, taxes run $280 a month, and insurance runs $140. At a 1.25 minimum, PITIA can't exceed $1,400 ($1,750 / 1.25). Subtract $420 for taxes and insurance and you're left with $980 for principal and interest. At 7.75% on a 30-year loan, that payment supports a loan of about $136,800, well short of the $150,000 LTV cap.

Cheaper houses with modest rents hit the DSCR cap first for a predictable reason. Rent rarely scales up as fast as the loan payment does at current rates, and taxes and insurance eat a fixed chunk of the rent no matter what the loan amount is. In this example, rent is 0.875% of value per month. At today's rates, that ratio usually can't carry a 75% LTV loan at 1.25 coverage, so rent sets the ceiling, not the appraisal.

The practical lesson is that the LTV figure in a lender's marketing is a ceiling you may never reach. Before you make an offer, calculate both caps and plan around the smaller one. That number is your real refi, and it should drive what you're willing to pay.

Worked Example: Finding Which Cap Binds on a $200K ARV Rental

Say your rehabbed single-family appraises at $200,000. Market rent comes in at $1,650 per month, property taxes run $250 per month, insurance is $110 per month, and there's no HOA. Your DSCR lender quotes a 30-year fixed at 7.5% with two caps: 75% LTV and a minimum 1.25 DSCR. Start with the LTV cap, because that's the number most investors plug into their spreadsheet and stop.

75% of $200,000 is $150,000. At 7.5% over 30 years, a $150,000 loan carries a principal and interest payment of about $1,049 per month. Add $250 in taxes and $110 in insurance, and full PITIA lands at roughly $1,409. Divide rent by PITIA: $1,650 / $1,409 = about 1.17. That fails the 1.25 minimum, so the lender won't fund the full $150,000 no matter what the appraisal says.

Now solve backward from the DSCR requirement instead. The lender needs rent to cover PITIA 1.25 times, so the most PITIA the property can support is $1,650 / 1.25 = $1,320. Taxes and insurance are fixed at $360, which leaves $960 for principal and interest. At 7.5% over 30 years, a $960 monthly payment supports a loan of about $137,300.

• LTV cap: $200,000 x 0.75 = $150,000
• DSCR cap: $1,650 / 1.25 = $1,320 PITIA, minus $360 = $960 P&I, which supports about $137,300
• Binding cap: the lower one, $137,300

DSCR binds here, and it costs you about $12,700 of refi proceeds compared with what the LTV math promised. That's $12,700 of your cash that stays trapped in the deal instead of coming back for the next one. If your plan assumed a full cash-out at $150,000, you either bring that money to closing or leave it parked as equity. The lesson is simple: always run both caps, and treat the lower result as your real loan amount before you ever make an offer.

Worked Example: Backing the Refi Cap Into a Maximum Purchase Price

The last section showed the DSCR cap binding at a $137,300 refi loan on this $200K ARV rental. Now flip the question. Instead of asking how much the bank will lend, ask how much you can pay for the house and still get your money back out. For this example, the goal is to leave no more than $10,000 of your own cash in the deal after the refinance.

Start with what the refi actually puts in your hands. The $137,300 loan minus about $4,000 in refi closing costs (appraisal, title, lender fees) leaves $133,300 in net proceeds to pay off your hard money and return your cash. Add the $10,000 you are willing to leave in, and your all-in project cost can be at most $143,300. Every dollar you spend above that stays trapped in the property.

Now strip out everything that is not the purchase price:

• Rehab: $40,000
• Hard money interest and points over a 6-month seasoning hold: about $14,000
• Taxes, insurance and utilities: $360/mo x 6 = $2,160
• Purchase closing costs: $3,000

That math is $143,300 minus $40,000, $14,000, $2,160 and $3,000, which leaves $84,140. Call your max purchase price roughly $84,100. Compare that to the 70% rule: ($200,000 x 0.70) minus $40,000 = $100,000. The refi math lands about $16K lower, because the 70% rule knows nothing about your lender's cap or your seasoning period. Pay $100,000 here and you would leave roughly $26K in the deal instead of $10K.

Time is the variable that keeps moving this number. Of the $14,000 financing cost, about $3,200 is points and the rest runs near $1,800 per month in interest. Add the $360 carrying cost and each extra month of holding costs about $2,160. A 7-month hold drops your max offer to about $81,980, and an 8-month hold drops it to about $79,820. Size your offer to a realistic timeline, not the best case your contractor promised.

Edge Cases That Move the Binding Cap After You Buy

The cap you calculate at purchase is a forecast, and several variables can shift before the refi closes. Rates are the biggest one. Say your rent supports $960 a month in principal and interest on a 30-year loan. At 7.0%, that payment carries a loan of about $144,300. At 8.0%, the same $960 carries only about $130,800, a $13,500 drop. Underwrite your offer at a rate at least one point above today's quote.

Property taxes are the next problem. Many counties reassess after a sale or major rehab, and lenders underwrite PITIA using the new tax bill, not the seller's old one. If $1,600 rent at 1.25 DSCR allows $1,280 PITIA and taxes plus insurance rise by $90 a month, your P&I room falls from $960 to $870. At 7.0%, the max loan drops to about $130,800. Pull the county millage rate and estimate taxes on your ARV, not the purchase price.

Rent is also not fully in your control. Most DSCR lenders use the lesser of the signed lease or the appraiser's market rent. If your tenant pays $1,650 but the appraiser's rent schedule says $1,550, the lender sizes the loan on $1,550. Build your numbers on conservative rent comps, and treat any lease above market as upside.

Seasoning rules affect how long you carry the deal. Some lenders refinance at appraised value after 6 months, while others require 12 months or cap the loan at your cost basis until then. Six extra months of interest-only hard money on $150,000 at 12% costs $9,000. Confirm the lender's seasoning policy before you buy, and budget holding costs for the longer timeline.

A low appraisal can flip everything back. If the $200K ARV comes in at $185,000, 75% LTV allows $138,750, which now sits below your $144,300 DSCR limit. LTV becomes the binding cap again. Run your offer against an ARV 5% to 10% below your estimate so a soft appraisal tightens the refi without leaving most of your cash stuck in the property.

Common Mistakes When Sizing a BRRRR Refi

The biggest mistake is treating 75% LTV as the only limit. On a $200,000 ARV, 75% gives you a $150,000 loan on paper. If the rent only supports $1,440 a month in PITIA at a 1.25 DSCR, though, the lender sizes the loan to whichever figure is smaller. Run both caps before you write an offer, every time.

The second mistake is plugging in pro forma rent. The appraiser builds a rent schedule from comparable leases nearby, not from the $1,950 you hope to get after new flooring. If comps support $1,800, that $150 gap cuts your allowable PITIA by $120 a month at a 1.25 DSCR. At a 7.5%, 30-year rate, $120 a month supports roughly $17,000 of loan you no longer get.

Third, investors leave items out of PITIA. HOA dues and flood insurance both count. A $150 HOA plus $90 a month in flood coverage adds $240 to the payment. At 1.25 DSCR, you need $300 more in monthly rent just to hold the same loan amount, so a condo or a flood-zone property can quietly flip which cap binds.

Fourth and fifth, the cost side gets shortchanged. Refi closing costs often run 2% to 3% of the new loan, which is $3,000 to $4,500 on $150,000. Many DSCR loans also carry a step-down prepayment penalty (such as 5-4-3-2-1), which matters if you might sell or refinance again early. Then there is seasoning: carrying a $160,000 hard money loan at 11% for six months costs $8,800 in interest before points. All of these belong in your all-in cost, or your "cash left in the deal" number is fiction.

Good refi math depends on good inputs. FlipSmrt pulls an ARV from adjusted MLS sold comps within half a mile, which gives the LTV side a defensible number instead of a hopeful one. Its line-item rehab budget is priced by trade for the property's county. That puts your all-in cost on real figures before you layer in rent, PITIA, and seasoning costs, rather than on spreadsheet guesses.

FAQ: DSCR Caps, Seasoning, and BRRRR Offers

What DSCR do most refi lenders require? Many DSCR lenders set their minimum somewhere between 1.0 and 1.25. Some will go below 1.0 if you accept a lower LTV or a higher rate. The requirement shifts with credit score, property type, and loan size, so treat any number you read online as a starting point and get your lender's exact minimum in writing. The difference between a 1.10 and a 1.25 requirement can move your maximum loan by thousands of dollars.

Does DSCR use P&I only or full PITIA? Most lenders calculate DSCR on full PITIA: principal, interest, taxes, insurance, and HOA dues if there are any. Say rent is $1,850 and full PITIA is $1,480. That works out to $1,850 / $1,480 = 1.25. If you divided by P&I alone ($1,100), you would get 1.68 and overestimate how much loan the property supports.

Can short-term rental income qualify? Some lenders accept STR income based on a trailing 12-month booking history or a third-party revenue projection, often with a haircut or a higher DSCR requirement. Others only use long-term market rent from the appraiser's rent schedule. Ask which rent source applies before you buy, not after the rehab. If the deal only works on STR numbers, your margin for error is thin.

What if I can't get the purchase price down to the DSCR-backed number? You have three options: bring more cash to the refi, hold longer and wait for rents to rise, or pass. For example, if the DSCR-backed loan is $138,000 and your all-in cost is $150,000, you leave $12,000 in the deal. Decide upfront whether the cash-on-cash return on that trapped capital still meets your target. If it doesn't, walk away.

How do I get a fast ARV and rehab figure before offering? Pull adjusted sold comps within about half a mile and price the rehab by trade for that county. FlipSmrt does both from an address or Zillow link in under 5 minutes, returning an adjusted ARV from MLS sold comps and line-item renovation costs. Plug those numbers into your LTV and DSCR caps, take the lower loan, and work backward to your offer before you submit it.