5 Irrational Things Conventional Lenders Do
 After years of dealing with banks and mortgage companies, I've come to accept that conventional lenders operate by rules that often make no logical sense. These aren't evil conspiracies. They're the result of bureaucratic risk management, outdated regulations, and institutions optimizing for their own metrics rather than borrower needs. Understanding these quirks can save you months of frustration and help you structure deals that actually get approved.
1. 12-Month Seasoning Requirement
You buy a property for $150,000, put $50,000 into renovations, and now it appraises for $250,000. You want to do a cash-out refinance and pull your investment back out. Logical, right? Not to conventional lenders.
Most banks require a 12 month "seasoning period" before they'll lend against the new appraised value. Until then, they'll only lend against your purchase price plus documented improvements. Why? Because the 2008 crash made them paranoid about inflated appraisals. So even if you have a legitimate appraisal from a licensed appraiser showing $250,000 in value, the bank won't acknowledge it for 12 months.
I learned this the hard way on my second property. Finished a full renovation in three months, got it appraised at $80,000 above purchase, and called my lender expecting to pull my cash back out. "That's great," they said. "Come back in nine months." Nine months of my capital sitting trapped in the walls of a building because of an arbitrary rule.
The workaround: DSCR (Debt Service Coverage Ratio) loans and portfolio lenders often have shorter or no seasoning requirements. They care about whether the property cash flows, not about arbitrary waiting periods.
2. Flawed DTI Calculations
Debt-to-income ratio is how lenders determine if you can afford a loan. The problem? Conventional lenders often only count 75% of rental income from the property you're buying to "account for vacancies."
Here's where it gets absurd. If you're buying a fourplex that generates $4,000/month in rent, the lender might only count $3,000 (75%) toward your income. But they'll count 100% of the mortgage payment ($2,500) against you. So a property that cash flows $1,500/month actually hurts your DTI. The math is backward. To make matters worse, lenders often use Schedule E of your tax return from 12 months ago to establish "actual rents" while using most up-to-date taxes and insurance to establish expenses.
Worse, if you're a full-time investor without W-2 income, conventional lenders may not want to talk to you at all. They'd rather lend to someone with a $60,000 salary buying their first rental than someone with a $500,000 portfolio of cash-flowing properties. Again, DSCR loans solve this by ignoring your personal income entirely and focusing on whether the property itself covers the debt.
3. Cash-Out Refi Limits That Make No Sense
You own a property worth $500,000 with no mortgage. You want to pull out $400,000 (80% LTV) to buy more properties. If this were a purchase loan, 80% LTV would be standard. But for a cash-out refinance, many lenders cap you at 75% or even 70% LTV.
Why? The theory is that borrowers who tap equity are riskier than buyers. Maybe that was true in 2008 when people were using home equity to fund lifestyles. But an investor pulling equity to buy more income-producing properties is actually reducing risk by diversifying. The lender doesn't see it that way.
The result: you can borrow more when buying a property than when refinancing one you already own. Sometimes investors will sell a property to themselves (yes, this is a thing) through an LLC just to reset the loan as a "purchase" and get better terms.
4. Appraisal Dependencies That Create Chaos
The entire mortgage industry depends on appraisals, but appraisers have enormous discretion and little accountability. Two appraisers can look at the same property and come back with values $50,000 apart, and I'm not talking about $50k difference on a million-dollar home either. Back in 2014, when I was buying my first Chicago property, the appraiser came back claiming the property that I was buying for $80k was only worth $30k. We later got another lender and another appraiser agree to the $80k purchase price - the same property appraised for $150k a year later, during cash-out refi. Your deal lives or dies based on which appraiser the bank randomly assigns.
Appraisers are supposed to be independent, but they know that if they consistently come in low, lenders will stop using them. So they're incentivized to hit target values when possible. But if comparable sales don't support the number, you're stuck. I've had deals fall apart because an appraiser decided to use comps from a worse neighborhood instead of closer, better matches. On one property, the appraiser used a comp from across a major highway.
There's no real solution here except to prepare extensive comp packages for the appraiser, meet them at the property to point out improvements, and have a backup plan if the appraisal comes in low. And accept that sometimes you'll lose deals to appraisal roulette.
5. Investment Property Rate Premiums
Buy a primary residence, and you'll get the lowest rates available. Buy the same property as an investment, and you'll pay 0.5% to 1% more, sometimes higher. The property is identical. The risk to the lender is actually lower because rental income helps cover the payment. But you pay more because of how the property is classified.
This extends to down payment requirements too. Primary residence: 3.5% down with FHA, 5-10% with conventional. Investment property: 20-25% down minimum. Again, the property hasn't changed. Only the checkmark on a form.
The house-hacking strategy exists largely because of this pricing disparity. Buy a fourplex as your primary residence, get owner-occupant rates and terms, live in one unit, rent out three. It's the same property you'd buy as an investment, but with dramatically better financing. The system practically forces investors into this approach.
Why DSCR Loans Exist
If you've noticed a pattern, it's that conventional lending rules don't work well for serious investors. DSCR loans emerged as an alternative. These loans don't care about your personal income, job history, or seasoning periods. They ask one question: does this property generate enough income to cover the debt?
DSCR loans typically require a 1.0-1.25x coverage ratio (meaning rent must be 100-125% of the mortgage payment) and come with slightly higher rates than conventional loans. But for investors who can't qualify conventionally, or who don't want to deal with the headaches above, they're a godsend. If you understand why leverage is the key to building wealth in real estate, you'll understand why getting around conventional lending restrictions matters so much.
The mortgage industry wasn't designed for real estate investors. It was designed for homeowners buying a single primary residence. As an investor, you're working against systems that see you as an edge case. Understanding the irrationality helps you navigate it, and knowing when to abandon conventional lending for alternatives can save you time and sanity.