DSCR or HELOC?

Question

A DSCR loan or HELOC for purchasing another mid-term rental? How does a DSCR loan work? Do they base it on my current rental property or primary residence?

AJ Wong · Answer

Hi Cole. A DSCR is a debt service coverage ratio loan (against the new property) and effectively uses a proportion of the current or proposed rental income to qualify. Typically 15-25% down or wherever the ratios work. A HELOC is secured against (in this case) the primary and can be utilized for either a proportion of the down payment or (if you have enough equity) the entire purchase price.

Many investors will use a HELOC or fixed second mortgage as the source of down payment funds to cover the 15-25% down on a DSCR or investment property mortgage. There are many other ways to qualify besides DSCR, like bank statement averages or even P&L statements that can offer lower down payments..check in with @Joseph Chiofalo he's a 20+ year mortgage colleague and can help with structuring and options. Good luck!

Erik Estrada · Answer

A DSCR purchase loan would be based on the purchase of the rental property. You may use a HELOC from your primary to finance the downpayment of the purchase of the rental property. You qualify based on the rents covering the full mortgage payment. No personal DTI required to qualify.

A HELOC would be based on your primary or investment property you currently own. Lenders will want to verify you can meet DTI and credit requirements to qualify.

Kerry Baird · Answer

@Cole Payton, yes there is a larger down payment for DSCR than with conventional.  I have found HELOCs that range from 70% LTV upwards, but they vary from lender to lender.  They are easier to obtain on owner occupied properties, and the LTV is higher on owner occupied houses than on rental houses.  The interest rate is variable, and we pay only on the amount that we draw from the line.  It can be drawn and repaid, drawn and repaid...somewhat like a big credit card that enables us to use equity in the house.  This affects DTI in a negative fashion, like a credit card would do.

The DSCR can be interest only for a period of time, often is 30 year repayment period.  The interest rates I have are fixed.  This product does not consider DTI but rather the cash flow that the property generates.

John Morgan · Answer

I love DSCR loans. Have done 5 of them. However, it all comes down to what the appraisal says market rent will be as a LTR not MTR. So if market rent supports the mortgage then you’re set.

Kerry Baird · Answer

@Cole Payton, I’m of the mindset to go with conventional mortgages for houses that I plan on holding, until the reserve requirements become too difficult.  I do ask for seller financing on every property I make an offer on.  Once lenders wanted huge sums of money for six months’ reserves, I used DSCR for purchasing rentals.  I want to keep reserves, but not 6 months for every house.

For an emergency fund, the HELOC on primary is really useful.  It is possible, though more expensive and difficult, to get a HELOC on an investment property.

Cole Payton · Answer

@River Sava I assume that by turnkey, you wouldn't recommend this option for a property needing renovations? Perhaps a fix and flip due to the higher rate? Yes, that would be helpful.

River Sava · Answer

Hi Cole - Really depends on your position. DSCR Loans are mortgage loans secured by residential real estate turnkey properties strictly used for a business purpose and underwritten primarily based on the property. If you are looking to continue to scale your portfolio it may be worth looking into a DSCR. DSCR loans do not rely on strict DTI ratios, allowing flexibile underwriting, and they support LLCs/entities. There are no size limits when it comes to these loans (conventional is around $725k max loan size) and can accommodate diverse assets like short/mid terms. There is also less paperwork invloved. Happy to chat further if you have questions.

Joseph Chiofalo · Answer

Hi Cole,

What price point would you be targeting on the new purchase?

There are programs available where lenders will allow up to 85% financing on an investment property purchase.

You could use a heloc to source and support down payment for the new purchase.

A DSCR loan is underwritten based off of the applicants credit and an appraisal rent schedule.

Katherine Blazer · Answer

You may be able to use the downpayment for a fix and flip loan if you are buying a property that needs updating and renovation, and then you would be able to refinance it into a DSCR. Depending on what the numbers look like some of the funds allow you to pull equity out after a few months. which would hopefully allow you to put money back into your heloc. However they will cap you at 70-75% loan to value.

DSCR or HELOC?

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