DSCR HELOANs: Home Equity Loans for Investment Properties

Designed for investors with significant equity, DSCR home equity loans (HELOANs) use a distinctive approach to evaluate your ability to repay debt, focusing on the property’s income-generating potential instead of your personal income.

What Is a Debt Service Coverage Ratio?

The debt service coverage ratio (DSCR) is a key financial metric that compares a property’s annual gross rental income to its total annual debt payments, including mortgage principal, interest, taxes, insurance, and other related costs. 

It helps lenders assess whether a borrower generates enough income to cover their debt obligations, with a DSCR of 1 meaning the income exactly covers the debt, above 1 indicating a buffer, and below 1 signaling negative cash flow and higher risk. 

Before applying, we suggest using our DSCR calculator to estimate your DSCR and see what this loan might look like for you.

Beyond lending, DSCR is useful when investing in real estate because it offers insight into a property’s financial health. A high DSCR shows strong income relative to debt, while a declining DSCR may point to falling rents or rising expenses. 

Who Should Consider a DSCR HELOAN?

A DSCR HELOAN is ideal for borrowers who want to leverage their investment property’s income rather than relying on traditional income verification methods. Consider this type of loan if you are:

• A real estate investor with one or more rental properties.
• Someone with complex or variable income streams that make traditional loans difficult to qualify for.
• An owner looking to tap into the equity of an income-generating property.
• Interested in refinancing or accessing cash without selling your investment property.
• Looking for flexible lending criteria based on property performance rather than personal income alone.

How Do DSCR HELOANs Work?

A DSCR home equity loan (HELOAN) is designed specifically for real estate investors looking to leverage their property’s rental income to access equity. Here are the key things to know about how DSCR HELOANs work: 

• DSCR HELOANs assess borrowing potential based on a property’s income-generating ability.
• Lenders use the DSCR to evaluate risk and repayment likelihood.
• This approach offers flexibility for investors with complex or diverse income streams who may struggle with traditional loans.
• Investors can leverage their rental property’s equity based on rental income.
• Griffin Funding accepts DSCRs as low as 1.

Some additional requirements to note when considering a DSCR home equity loan are:

• Minimum loan amount: $100,000
• Maximum loan amount: $500,000
• Minimum credit score: 680
• Prepayment penalty: Choose from 5-year, 4-year, 3-year, 2-year, 1-year, or none
• Term: 15-year, 20-year, 25-year, or 30-year fixed
• Maximum combined loan-to-value: 80% (meaning if your rental property is worth $1,000,000 and the existing first mortgage is at $500,000, the maximum DSCR HELOAN loan amount you’d be able to qualify for would be $300,000)
• Property types: Only investment properties are eligible for DSCR HELOANs and an appraisal with comparable rent schedule 1007 is required. SFR, PUD, townhome, 2-4 units are all eligible for DSCR HELOANs.

Benefits of DSCR HELOANs

Whether you’re looking to renovate or leverage property equity to buy more investment properties, DSCR HELOANs can help you secure the funding you need. The benefits of DSCR HELOANs include:

• No tax returns necessary: Traditional loans require detailed tax returns to assess a borrower’s financial health. With DSCR HELOANS, the focus is on the property’s income rather than personal income.
• No traditional income verification: Rather than evaluating personal earnings, DSCR lenders look at the property’s rental income, making the qualification process much smoother for investors.
• Leverage equity and access cash: Just like traditional home equity loans, DSCR HELOANs allow borrowers to tap into the accumulated equity of their investment properties without having to touch the rate on their first mortgage.
• Streamlined approval process: By focusing on the property’s income and not the borrower’s financial situation, the approval process can be more straightforward and faster than traditional loans.
• Flexibility: DSCR HELOAN lenders may offer more flexibility in borrowing terms. For instance, a lender might provide a larger loan amount or more favorable terms if the DSCR indicates the borrower has significant income relative to their debt obligations.

Keep in mind there are pros and cons of DSCR loans and HELOANs investors should consider. For instance, DSCR loans typically require higher down payments and interest rates. Contact us today to learn if a DSCR HELOAN is right for you. By talking to one of our mortgage experts about your unique financial situation, we can help you find the right home equity loan based on your needs.

Contact us today to learn if a DSCR HELOAN is right for you. By talking to one of our mortgage experts about your unique financial situation, we can help you find the right home equity loan based on your needs.

DSCR HELOAN vs. a DSCR Cash-Out Refinance

If you are considering accessing cash from your existing rental property, you should compare the benefits and limitations of DSCR HELOANs and DSCR cash-out refinance loans.

• Maximum loan amount: $500,000 vs $5,000,000
• Maximum loan-to-value: 80% vs 80%
• Minimum DSCR: Greater than 1 vs less than 1
• Interest Rate: DSCR HELOAN interest rates are significantly higher than DSCR cash out refinance loan rates
• Payments: Two payments vs one

How to Get a DSCR HELOAN

Griffin Funding offers a straightforward and streamlined application process. To get a home equity loan on an investment property, follow these steps:

1. Complete an online application: Gather all necessary documentation, such as proof of rental income and existing debt documentation. Then, complete our online application.
2. Appraisal: Once you’ve completed your application, we’ll order a third-party appraisal to determine the property’s market value and comparable rents.
3. Underwriting: After you’ve sent us all the necessary documentation for your application, we’ll go through the underwriting process, where we calculate your DSCR based on proof of rental income, like leases and existing debt on the property.
4. Loan approval: Once we obtain loan approval, we’ll reach out with anything else we need to finalize your loan documents.

Apply for a DSCR Home Equity Loan Today

Leverage the full potential of your investment property with DSCR HELOANs. These loans recognize the value and income-generating power of your property. By focusing on rental income and the property’s value, DSCR HELOANs offer a tailored solution for investors, offering greater flexibility and opportunities to access capital.

Griffin Funding simplifies the application process to ensure you’re supported every step of the way. Our team of experts is dedicated to providing clear insights, competitive rates, and a seamless experience. Apply for a DSCR HELOAN online today to tap into your investment property’s equity.

Want to see if you qualify for an investment property home equity loan? Reach out today and we can help you determine whether this financing option is right for you.