What Is a DSCR HELOC? Definition, Requirements, and How DSCR Qualifies the Line
By Travis Penny, mortgage broker ·
A DSCR HELOC is two familiar ideas joined into one loan. DSCR is how a rental shows it pays its own way. A HELOC is a line of credit against equity. Together they make a DSCR HELOC, a line on a rental that qualifies on the rent instead of your paycheck.
For the full walkthrough, start with my guide to HELOC on an investment property.
This post defines it, shows how the DSCR test qualifies the line, and lists the requirements in one place.
What is a DSCR HELOC?
A DSCR HELOC is a home equity line of credit on an investment or rental property. It qualifies on the debt service coverage ratio, which compares the property's rent with its full monthly payment. Your personal income is not the main test.
It sits behind your existing first mortgage, so you keep that loan and its rate. It's a business purpose loan for investment and rental properties only, never a primary or second home.
The CFPB describes a HELOC as an open end line of credit that lets you borrow repeatedly against your equity. A DSCR HELOC keeps that idea with one difference at the start. At least 80% of the line is drawn at closing, with a $50,000 minimum.
How does DSCR qualify a DSCR HELOC?
DSCR is the monthly rent divided by the full monthly payment. On a DSCR HELOC, the payment is the first mortgage and the line together, including taxes, insurance, and any association dues. Many programs figure the line's payment on the full credit limit, not just what you draw.
The ratio has to come out at 1.10 or higher. In plain terms, the rent has to cover the whole payment with a little left over. My DSCR Calculator shows where your rental lands, and that test takes the place of pay stubs and tax returns.
The rent going into that math comes from the lease. A signed lease has to be in place, and on a 2 to 4 unit property no more than one unit can be vacant. The rent used is the lower of the lease or the appraiser's market rent.
What are the DSCR HELOC requirements?
Here are the numbers on a rental that already has a first mortgage.
| Requirement | DSCR HELOC |
|---|---|
| Line size | $50,000 to $500,000 on a rental that already has a first mortgage |
| Combined loan to value | Up to 70% |
| Credit score | 720 or higher |
| Minimum DSCR | 1.10 |
| Ownership | At least 6 months |
| Draw at closing | At least 80% of the line, $50,000 minimum |
| Lease | Signed lease in place |
| Rate | Variable |
A few things rule a property or a borrower out. Short term rentals and vacant properties don't fit, and foreign nationals and ITIN borrowers aren't eligible. Mobile, manufactured, modular and log homes don't qualify, and neither do rural rentals.
How is a DSCR HELOC different from a regular HELOC?
A regular HELOC on the home you live in is a consumer loan. The lender reads your pay stubs, tax returns, and debt to income ratio. A DSCR HELOC looks at the property first, and tax returns and W-2s usually are not the deciding factor.
Lenders still pull credit and look at the property value, the existing mortgage balance, and how the property is titled. You can hold title in your own name or an LLC in most states, and Montana and Virginia are LLC only. My DSCR LLC guide explains how that works.
Who are DSCR HELOC lenders?
DSCR HELOC lenders are mostly wholesale lenders that make investor lines of credit and work through mortgage brokers. Many banks only offer HELOCs on the home you live in. As a broker, I match your rental to a lender whose rules fit it, instead of sending you bank to bank.
Where is a DSCR HELOC available?
The DSCR HELOC states I work in are Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Hawaii (not Hawai'i Island), Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland (not Baltimore City), Michigan, Mississippi, Missouri, Montana (LLC only), Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas, Vermont, Virginia (LLC only), Washington, Wisconsin and Wyoming.
California is not eligible.
Related reading: HELOC on a rental property.
What's the next step?
Run the rent and the full payment through the DSCR Calculator. It takes about a minute. Text me at (207) 615-7770, or send the address, your current balance, and the lease through the contact form. I'll check the ratio myself.
FAQ
What is a DSCR HELOC?
A DSCR HELOC, which Travis Penny arranges on investment and rental properties, is a home equity line of credit that qualifies on the property's rent compared with its full monthly payment instead of your personal income. It sits behind your existing first mortgage, so that loan stays in place.
What are the requirements for a DSCR HELOC?
Travis Penny's DSCR HELOCs on investment and rental properties require a 720 or higher credit score, a minimum DSCR of 1.10, at least 6 months of ownership, and a signed lease. Lines run from $50,000 to $500,000, up to 70% combined loan to value, on a rental that already has a first mortgage.
What DSCR do you need for a HELOC?
Travis Penny's DSCR HELOCs on investment and rental properties need a DSCR of at least 1.10, figured on the first mortgage and the line together. Many programs figure the line's payment on the full credit limit.
Can I get a DSCR HELOC in an LLC?
Yes, Travis Penny arranges DSCR HELOCs on investment and rental properties held in an LLC, and in Montana and Virginia the LLC is required. In most other states on the list, title can be in your own name or an LLC.
Does the rent cover the payment?
Enter the rent and the full monthly payment to see the DSCR on a property before you make an offer.
Run your numbers