.png)
Similar to how there are numerous nuances and exceptions to the standard definition of DSCR Loans when it comes to requiring collateral to be residential in nature (i.e. sometimes mixed-use properties are okay, what is “residential” vs. “multifamily”, etc.), there are similar nuances to consider when it comes to the turnkey property condition requirement. Even though the “turnkey” property requirement means that eligible homes or units are in full rent-ready condition, all grizzled real estate investors know that there is seemingly always a list of things that could be fixed or touched up when it comes to any property.
The main standard for property condition eligibility for DSCR Loans is no more than $2,000 in deferred maintenance identified by the appraiser and a C1 – C4 condition rating as described by Fannie Mae’s UAD 3.6 Dwelling Condition Ratings (and not rated C5 or C6). Both of these requirements are found in the independent third-party appraisal required for all DSCR Loans.
The C1 – C6 scale is a rating methodology system utilized by appraisers and mortgage lenders, relied on by both conventional lenders and DSCR Lenders alike. The following chart provides a rundown of each rating level on the scale.
DSCR Loans can typically be used to finance properties with C2, C3 or C4 conditions. C2, or “like-new” properties are common for refinance DSCR Loans for investors utilizing the BRRRR Method – as investors refinance a hard money loan used to buy and renovate a property in bad condition (likely C5 or C6) and then refinance into lower-rate, long-term debt with a DSCR Loan once the full renovation is complete. C3 and C4 properties are the sweet spot of properties in good or average condition, perfect for basic turnkey buys or refinances of ongoing rentals.
DSCR Loans can also be utilized for C1 properties, including both acquisitions of new builds and refinances of newly constructed rather than newly renovated properties (so-called “BRRRR 2.0”), however, especially in the case of refinances of new construction, this is still a new and developing area for many DSCR Lenders, as many guideline sets didn’t anticipate the growing, Build-To-Rent (“BTR”) phenomenon.Properties with C5 or C6 ratingsare a universal “no-go” for DSCR Loans. However, if a property receives a C5 rating from an appraisal, there can sometimes be options to improve the rating to an eligible status (like C4) relatively quickly (i.e. salvaging the deal) depending on the flagged issue that requires a fix.
.png)
The standard appraisal ordered for a DSCR Loan will determine a value of the property “as-is.” This is self-explanatory and generally just means the appraiser is evaluating the property as it exists in its current condition, on the date that the appraiser visited in person and made evaluations. DSCR Lenders will always require a completed appraisal evaluating and valuing the property on an “as-is” basis and a condition rating between C1 and C4. As part of the appraisal process, any repairs needed (referred to as “deferred maintenance” in the industry), need to be identified and assigned a dollar value of estimated costs to fix. This can include minor repairs needed, typically with a cumulative (i.e. evaluated in total costs if multiple repair items flagged) dollar value limit of deferred maintenance of $2,000 to be considered C4 or better and not in the “C5” bucket.
There are several common deferred maintenance items (< $2,000) that would likely be present at a C4-rated property, that do not hinder eligibility for DSCR Loans. Typical examples include Peeling or Faded Exterior Paint, especially around trim, fascia boards, or window sills that can be spot-treated rather than fully repainted and Minor Roof Repairs, consisting of loose or missing shingles and small flashing issues. As long as the roof isn’t leaking, these are usually minor touch-ups.
Minor deferred maintenance can also include Cracked or Missing Caulking Around Windows/Doors which is typically easy to replace and improves energy efficiency or Dripping Faucets or Minor Plumbing Leaks such as sinks, tubs, or hose bibs with slow drips and can be typically fixed with a washer or simple replacement part. Other similar findings that don’t preclude a C4 or better rating include Worn or Damaged Carpet in One Room, which can often patched or replaced without full flooring renovation and Non-Functional Light Fixtures or Ceiling Fans such as burned-out bulbs or wiring issues in basic fixtures, which are cheap to fix and don’t require licensed work in many jurisdictions.
Additionally, Sagging or Broken Gutters (i.e. sections pulled away from fascia or clogged with debris, Minor Cracks in Walkways or Driveways (i.e. small surface-level cracks in concrete or pavers), HVAC Filter Replacement and Grime Buildup (such as dirty filters and dusty vents), and even Malfunctioning Garage Door Opener can be flagged in the deferred maintenance area of the appraisal, but shouldn’t exceed $2,000 in needed repairs.
There are unfortunately some cases in which the property is not in the needed condition range, but has moderate repairs needed (i.e. exceeding $2,000), that can be addressed fairly quickly and inexpensively. Often, the appraiser will include what is called a “subject-to” value which instead of describing the property’s current condition, will assign a hypothetical value that the property would have if certain conditions are met such as a fixing of the identified deferred maintenance.
These situations are somewhat common in DSCR loan transactions, as a tried-and-true investment strategy is for investors to create value by buying poorly managed properties and generating returns by improving ownership; such as with more responsible maintenance and/or charging higher rents. Properties on the market that can appear to be turnkey and in solid condition can have moderately significant issues hiding under the surface that must be addressed for the purchase to go through with DSCR financing.
The good news is that despite this issue likely causing delays in the deal – typically a couple of weeks – it is often salvageable if the seller of the property is willing to address the issue and complete the repairs. This will generally require the appraiser to re-visit the property, confirm the issue has been resolved and re-issue an updated appraisal, confirming issues are resolved and property is C4 or better in its new “as-is” condition.
Below is a table of common moderate deferred maintenance that exceeds the required $2,000 threshold to be eligible for DSCR financing; but is relatively lower in cost and time to fix if the parties want to continue pursuing the transaction.
An appraisal showing significant deferred maintenance isn’t quite a kiss of death for DSCR Loans, but can throw a wrench in an otherwise on-track deal. In these cases, make sure there is clarity in both the issue and resolution, and the timeline on potential solutions in looking to keep these deals on track to close.
© 2026 Harpoon Capital, LLC. All Rights Reserved. WARNING: Unauthorized distribution, copying, or sharing of this guide is a violation of U.S. Federal Law and is punishable by civil penalties of up to $150,000 per violation. We aggressively enforce our intellectual property rights.
