If you’re a real estate investor looking to tap into the equity of your income-generating properties, a DSCR (Debt Service Coverage Ratio) HELOC might be exactly what you need.
Unlike a cash-out refinance, which pays you a lump sum by refinancing your current mortgage, a DSCR HELOC is a revolving credit line that allows you to access your rental property’s equity with maximum flexibility.
In this guide, we’ll break down:
- What a DSCR HELOC is and how it works
- How to qualify for a DSCR HELOC
- The pros, cons, and what to expect with rates and terms
If you’re considering leveraging your rental property’s equity, keep reading to discover why a DSCR HELOC could be the best financial tool for your investment strategy.
What is a DSCR HELOC?
DSCR stands for Debt Service Coverage Ratio, a key metric that measures a property’s ability to generate enough income to cover its debt payments. In simpler terms, it’s the ratio of your rental property’s cash flow to its monthly expenses.
How to Calculate DSCR
To calculate the DSCR for your property:
Rental Income ÷ Total Monthly Payment (Mortgage + Taxes + Insurance + HOA, if applicable)
Example:
If your property rents for $4,000/month and the total monthly payment is $3,200/month, your DSCR is:
DSCR= 4,000 / 3,200 = 1.25
This means your property is generating 25% more income than it costs to maintain—a good indicator that the property is performing well.
💡 Pro Tip: Lenders generally require a DSCR of at least 1.0, meaning the property breaks even or generates positive cash flow.
What is a HELOC?
A HELOC (Home Equity Line of Credit) allows you to borrow against your property’s equity, much like a second mortgage. But unlike a traditional loan, a HELOC functions more like a hybrid between a credit card and a checking account.
✅ Revolving Credit Line: You’re approved for a maximum amount, but you only pay interest on what you actually draw.
✅ Flexibility: Use the funds when an investment opportunity arises, with no payments if you don’t have a balance.
✅ Easy Access: You can withdraw money using a checkbook, transfer funds, or even use an ATM card linked to the account.
Example:
If you’re approved for a $100,000 HELOC but only draw $20,000 for a property rehab, you’ll only make payments based on that $20,000—just like a credit card.
🎯 Ready to tap into your equity? Contact Us today to explore your DSCR HELOC options!
How do you qualify for a dSCR HELOC?
To qualify for a DSCR HELOC, lenders look at three main factors:
1. DSCR Requirement
Your property’s DSCR must be 1.0 or higher, accounting for both the existing mortgage and the new HELOC payment. This reassures lenders that your rental income can cover the additional debt.
2. Credit Score
A minimum credit score of 680 is typically required to qualify. However, for prime terms and lower rates, aim for a credit score of 760+.
3. Loan-to-Value (LTV) or Combined Loan-to-Value (CLTV)
Lenders generally allow a CLTV of up to 75%.
Example:
Property value: $600,000
Existing mortgage: $300,000 (50% LTV)
Maximum HELOC limit: $150,000 (to reach 75% CLTV)
✅ Need help calculating your eligibility? Reach out to us to get a personalized assessment of your property’s equity potential!
Why Choose a DSCR HELOC Over a Cash Out Refinance?
A cash-out refinance requires you to take the entire lump sum upfront, meaning you start paying interest on the full amount immediately. A DSCR HELOC, on the other hand, allows you to:
- Access Funds as Needed: Draw funds only when investment opportunities arise.
- Pay Interest Only on What You Use: No payments unless you have a balance.
- Maintain Flexibility: Avoid taking on unnecessary debt when you don’t need it.
💡 Example:
If a new investment opportunity comes up, you can quickly draw from your HELOC rather than going through a lengthy refinance process.
What Are the Rates and Terms for a DSCR HELOC?
Interest rates for DSCR HELOCs are variable and typically tied to the prime rate, which is currently around 7.5%.
- Rates: Expect rates between 10-12% for prime credit borrowers with a 60-70% LTV.
- Draw Period: Typically 3-5 years, during which you can draw funds and make interest-only payments.
- Repayment Period: Usually 20-25 years after the draw period ends, transitioning to full principal and interest payments.
⚠️ Important: If you max out your HELOC and don’t plan ahead, the shift to fully amortized payments can seriously impact your cash flow. Be prepared to refinance or replace the HELOC when needed.
Refinancing or Replacing Your DSCR HELOC
Once your draw period ends, you have two main options:
Refinance the HELOC: If you still qualify, you can apply for another DSCR HELOC.
Cash-Out Refinance: Combine your primary mortgage and the HELOC into a single new loan.
Not sure which option is best? Let’s Talk! We’ll walk you through your options to maximize your investment returns.
Where to Get a DSCR HELOC
You won’t find a DSCR HELOC at a traditional bank, credit union, or retail mortgage lender. To secure this type of loan, you’ll need to work with a:
- Commercial Lender
- Non-QM Lender
- Mortgage Broker Specializing in Non-QM Loans
That’s where Andes Mortgage comes in!
We are a Mortgage Brokerage that specializes in Non-QM loans and we have multiple offers for DSCR HELOC loans.
Give us a call at (770) 740-4050 or book a call with us by clicking this link. Our consultations are 100% free and we’ll be happy to provide you with answers to your scenarios.
