You find a clean three-bedroom, priced about twenty percent under the comparable sales, in a neighbourhood you already own in. The listing says nothing unusual. Then the title commitment arrives and Schedule B-II has an exception referencing a declaration of restrictive covenants recorded by a county housing authority in 2019, running with the land for thirty years.
That is a deed-restricted property, and it is not automatically a bad deal. It is a deal where the price discount exists for a reason, and the reason is written into the land records. Here is what those documents actually do and how a lender treats them.
What a recorded affordability covenant is
When a public agency, land bank, or nonprofit puts subsidy into a property, it usually wants that subsidy to keep producing affordable housing after the original transaction. The mechanism is a recorded instrument that binds all future owners. Common names are declaration of restrictive covenants, land use restriction agreement, regulatory agreement, or deed rider.
The content varies enormously, but the provisions that matter to an investor cluster into four categories.
- Rent caps. The maximum rent is set by formula, often a percentage of area median income published annually, sometimes less utilities. This is the provision that touches your loan most directly.
- Tenant income limits. You may only rent to households under a stated income threshold, with certification and recertification obligations.
- Resale restrictions. A maximum resale price, a right of first refusal held by the agency, or a required approval before transfer.
- Use and occupancy requirements. Sometimes owner occupancy is required outright, which makes the property ineligible for an investor loan entirely.
The term is usually long. Fifteen, thirty, even ninety-nine years, and some are perpetual. Check the recording date and the term, because a covenant with four years left is a completely different asset than one with twenty-six.
The first question: is it even an investment property
Before anything else, read the occupancy provision. If the covenant requires the owner to occupy the unit as a principal residence, the deal is over for an investor loan. A DSCR loan is a business-purpose loan on a non-owner-occupied property, which is exactly why you cannot live in the property. A recorded document requiring you to do so is a direct conflict, and no lender is going to close into it.
Owner-occupancy covenants are common on properties sold through first-time homebuyer programs. They are the single most frequent reason these deals die, and they die late, because the covenant is usually only read when the title work comes back.
How the rent cap changes your ratio
Assume occupancy is fine and you have a genuine rental restriction. Now the arithmetic.
Ordinarily a lender uses the lesser of the in-place lease rent and the appraiser’s market rent opinion, set out in how Form 1007 sets the number your ratio runs on. With a recorded cap, a third number enters, and the lender will generally use the lowest of the three.
Worked example. A duplex under contract at 215,000 dollars. Market rent on the appraisal is 1,350 dollars per side, so 2,700 dollars total. The covenant caps rent at sixty percent of area median income for a two-bedroom, which in this county works out to 1,040 dollars per side, so 2,080 dollars total.
You are borrowing 161,250 dollars at seventy-five percent loan to value, 7.375 percent, thirty years. Principal and interest is about 1,114 dollars. Taxes 215 dollars, insurance 130 dollars. PITIA is 1,459 dollars.
On market rent: 2,700 divided by 1,459 gives a DSCR of 1.85. Excellent.
On capped rent: 2,080 divided by 1,459 gives a DSCR of 1.43. Still strong.
That is the shape of a workable deed-restricted deal. The purchase price was discounted because of the restriction, so the payment came down with it, and the capped rent still clears comfortably. Run your own numbers on the DSCR deal calculator using the capped rent, never the market rent, and if you want the arithmetic itself explained start with how to calculate DSCR.
Where it breaks is when the discount does not match the restriction. If that same duplex were priced at full market value of 265,000 dollars, the loan would be 198,750 dollars, principal and interest about 1,373 dollars, PITIA about 1,718 dollars, and 2,080 divided by 1,718 gives 1.21. Thinner, and you paid market price for a below-market income stream. That is the trap.
The valuation problem underneath it
A restricted property is worth less than an unrestricted one, and the appraisal has to reflect that. Two issues follow.
First, the appraiser needs to know the restriction exists. They frequently do not, because the listing does not mention it and the title work has not circulated yet. An appraisal that values the property as unrestricted is wrong and will be corrected when the underwriter reads the commitment, which costs you a revision and a week.
Second, finding comparable restricted sales is hard. There may be three in the county. The appraiser then either uses unrestricted sales with a large downward adjustment, or reaches geographically for restricted ones. Both of those are the problem described in rural and thin-market rental appraisals, and they produce the same result: bigger adjustments, more review, a longer clock. This is especially common outside metro areas, including markets like the ones covered in the Montana investor guide, where restricted inventory is scattered across a large territory.
Where this overlaps with voucher rentals, and where it does not
Investors conflate two different things constantly, so let me separate them.
A deed restriction runs with the land and binds you whether or not you want it. A housing choice voucher is a contract with a specific tenant and a housing authority, entered into voluntarily, and terminable. Underwriting treats them differently. Voucher income has its own treatment, described in how housing voucher income underwrites, and the key point there is that a portion of the rent is paid by a government agency under a HAP contract.
They do sometimes stack. A deed-restricted unit rented to a voucher holder means you have a covenant capping the contract rent and an agency paying part of it. That is not a problem, but it is two sets of paperwork and two sets of annual recertifications. If you are running that combination, read the voucher piece alongside this one, because the payment standard and the contract rent interact with the covenant cap in ways that are not obvious.
Rent control is a third thing again, imposed by statute rather than by a recorded instrument on your parcel, and it underwrites differently. That is covered in underwriting a capped rent roll.
The resale restriction is the one investors underprice
Rent caps are visible every month, so people model them. Resale restrictions are invisible until exit, so people ignore them, and they are frequently the more expensive provision.
A maximum resale price formula, often original price plus a fixed annual escalator, means your appreciation is contractually capped. If the covenant allows three percent a year and the market does eight, you do not capture the difference. Your return is rent and amortization, full stop. That can still be a fine investment. It is a different investment than the one you thought you were making.
A right of first refusal is less severe but affects timing and your buyer pool. The agency typically gets thirty to ninety days to match any offer. That window is real and it is the reason your eventual buyer’s lender will care too.
Both provisions affect a refinance as well as a sale, because the lender is underwriting the collateral it may one day have to liquidate. A property that can only be sold to an income-qualified buyer at a formula price is a narrower collateral position, and that usually shows up as a lower maximum loan to value rather than a decline.
Diligence checklist
- Get the actual recorded document, not a summary. Pull it from the county or ask the title agent for a copy of the instrument referenced in Schedule B-II.
- Find the term. Recording date plus duration. Note whether it renews on transfer, which some do.
- Read the occupancy clause first. If owner occupancy is required, stop.
- Find the rent formula and get the current year published figures from the administering agency in writing.
- Find the resale provision and model your exit at the capped price, not at market.
- Find out whether transfer requires agency approval, and how long that takes. Sixty days of agency review inside a forty-five day contract is a problem.
- Give the whole package to the lender at application. Do not let the underwriter discover it from the title commitment in week three.
That last item is the difference between a normal file and a file that needs an exception. Disclosed up front, a deed restriction is a known variable the lender prices. Discovered late, it is a surprise, and surprises get repriced or declined.
The short version
A recorded affordability covenant is not a defect. It is a trade: below-market price for below-market rent and a constrained exit. The deals that work are the ones where the discount on the purchase price is larger than the discount on the income and the exit combined.
Underwrite it on the capped rent. Model the exit on the capped price. Read the occupancy clause before you spend a dollar on due diligence. Do those three things and the restriction becomes a number in your model rather than a discovery in week three.
FMC Capital is a Pittsburgh-based mortgage brokerage. We place loans on rentals and flips across Pennsylvania and additional states and serve investors throughout Western PA. If you have a deed-restricted property under contract and want to know how it will underwrite, get in touch or call 412-990-2941. Related: year-end documentation on an investor loan and title endorsements worth paying for.
FMC Capital, NMLS #1840537. General information for real estate investors, not legal or tax advice. Covenant terms, income limits, agency procedures, guidelines, and loan pricing vary by program, jurisdiction, lender, and property, and are subject to change. Read the recorded instrument and consult your own attorney.