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, I’m going to 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
What is a DSCR HELOC?
DSCR stands for Debt Service Coverage Ratio, and this is 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.
Think of it as having a credit card but one with a pretty large credit line limit and tied to your house – Because well, it uses your house as collateral.
These are some really cool features about HELOCs:
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.
⚠️ 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.
How to qualify for a DSCR HELOC?
To qualify for a DSCR HELOC, lenders look at three main factors:
DSCR Requirement
Your property’s DSCR must be 1.0 or higher, accounting for both the existing mortgage and the new HELOC payment.
This shows lenders that you’re not going to have negative cash flow from your rental income.
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+.
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 vs a cash out refinance for your investment property?
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.
