If you’re looking to invest in real estate or unlock the value of your home, choosing the right type of financing is important. Two common options are DSCR loans and HELOCs. But which one is better for your situation?
In this article, we’ll break down what each loan is, how they work, the pros and cons, and when one might be a better choice over the other. Everything is explained in simple terms, so even if you’re new to real estate or home financing, you’ll find it easy to follow.
Key Takeaway:
- DSCR loans are best for real estate investors focused on rental income rather than personal income.
- HELOCs are ideal for homeowners who want flexible access to their home equity.
- DSCR loans require a large down payment but minimal income documentation.
- HELOCs offer lower interest rates but come with variable terms and the risk of losing your home if unpaid.
- Choose a DSCR loan to buy income-generating property; choose a HELOC to fund personal expenses using existing home equity.
- For more information, check here and here.
What Is a DSCR Loan?
DSCR stands for Debt Service Coverage Ratio. A DSCR loan is designed for real estate investors. It’s used to buy income-generating properties like rental homes, apartments, or commercial buildings.
Unlike regular loans that look at your personal income, DSCR loans focus on how much money the property will earn each month through rent. If the income from rent is enough to cover the mortgage payments, then you’re more likely to be approved.
How DSCR Works
Lenders calculate a number called the Debt Service Coverage Ratio to see if your property will bring in enough money to cover the loan.
Here’s the simple formula:
DSCR = Net Operating Income ÷ Total Loan Payment
- A DSCR of 1.0 means your property makes just enough to cover the loan payments.
- A DSCR above 1.0 means you have extra income after paying the loan, which is good.
- A DSCR below 1.0 means you’re not making enough, and lenders may reject the loan.
Example
Let’s say your property earns $2,500 per month in rent. The total monthly loan payment is $2,000.
DSCR = $2,500 ÷ $2,000 = 1.25
A DSCR of 1.25 means your rental property earns 25% more than the loan payments, which is a positive sign for lenders.
What Is a HELOC?
HELOC stands for Home Equity Line of Credit. This type of loan lets you borrow money against the equity you have in your home.
Equity is the difference between your home’s value and what you still owe on your mortgage. If your home is worth $300,000 and you owe $200,000, your equity is $100,000.
With a HELOC, you can borrow from that $100,000 and use the money for anything—renovations, emergency expenses, education, or even to invest in property.
How HELOCs Work
- A HELOC is a revolving line of credit. That means you can borrow, pay it back, and borrow again.
- It has a draw period, usually 5 to 10 years, where you can use the funds.
- After the draw period, you enter a repayment period (10 to 20 years), where you must start paying both the interest and principal.
Example
If you’re approved for a $50,000 HELOC, you can borrow a little now, some later, or use the full amount. If you only use $10,000, you’ll only pay interest on that $10,000, not the full $50,000.
DSCR Loan vs HELOC: Key Differences
Here’s a quick table to compare the two:
| Feature | DSCR Loan | HELOC |
|---|---|---|
| Purpose | Buy rental/investment property | Borrow from your home’s equity |
| Approval Based On | Property’s rental income | Your credit score, income, and home value |
| Documentation | Minimal (no personal income proof) | Requires proof of income, credit score, home appraisal |
| Loan Structure | Fixed mortgage-style loan | Revolving credit line |
| Interest Rate | Fixed or variable, usually higher | Variable, often lower |
| Down Payment | 20–30% of property value | No down payment (borrowing against existing equity) |
| Risk | Risk if property doesn’t earn enough | Risk of rising interest rates and losing home if unpaid |
Pros and Cons of DSCR Loans
Pros
- No W-2 or tax returns required: You don’t need to show your job income.
- Quick approval: Lenders mostly care about the rental income.
- Great for investors: Designed for people with multiple properties or self-employed.
Cons
- Higher interest rates: Since it’s riskier for lenders, the rates are often higher than traditional loans.
- Large down payment: You might need 20% to 30% upfront.
- Rental income risk: If your property stays vacant, it can be hard to refinance or repay.
Pros and Cons of HELOCs
Pros
- Flexible borrowing: Take only what you need and repay it over time.
- Lower upfront costs: No big down payment is required.
- Interest-only payments at first: During the draw period, you only pay interest, which can help with cash flow.
Cons
- Variable interest rates: Your payment may go up if the prime rate increases.
- Can lose your home: If you don’t pay, the bank can take your house.
- Fees and conditions: Some HELOCs come with setup fees, annual fees, or minimum withdrawal amounts.
When Should You Use a DSCR Loan?
A DSCR loan might be right for you if:
- You’re buying an investment property that will generate rental income.
- You don’t want to provide personal income documents.
- You are self-employed or don’t qualify for traditional loans.
- You have a solid down payment and a profitable property in mind.
When Should You Use a HELOC?
A HELOC might be better if:
- You own a home and have enough equity built up.
- You need access to funds for home improvements, education, or emergencies.
- You want the flexibility of borrowing small or large amounts over time.
- You’re comfortable with variable interest rates.
Real-Life Scenario Comparison
Case 1: Jane the Investor
Jane wants to buy a duplex and rent out both units. She’s self-employed, and her tax returns don’t show a high net income due to business deductions. A DSCR loan allows her to qualify using the projected rental income from the duplex—not her personal income. She puts 25% down and gets approved.
Case 2: Mike the Homeowner
Mike has lived in his home for 10 years and has built up $150,000 in equity. He wants to renovate his kitchen and bathroom. Instead of taking out a traditional loan, he gets a HELOC for $75,000. He uses $20,000 right away and plans to use more later as needed.
Which Is Better?
It depends on your goals:
- Use a DSCR Loan if you’re buying a new property for income and want to grow your real estate portfolio.
- Use a HELOC if you already own a home and want flexible cash for personal projects or emergencies.
Compare different DSCR lenders from this article about best dscr loan lenders. Also, read about Offermarket reviews.
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FAQs
What is a DSCR HELOC?
A DSCR HELOC is not a common financial product, but the term is often confused or misused. DSCR (Debt Service Coverage Ratio) loans and HELOCs (Home Equity Lines of Credit) are two distinct types of financing. A DSCR loan is primarily used by real estate investors to purchase income-generating properties based on the property’s cash flow, not the borrower’s income. A HELOC, on the other hand, is a revolving credit line that homeowners use to tap into their home equity. Some lenders may creatively market HELOCs to investors and assess cash flow using DSCR principles, but traditionally, the two products serve very different purposes and are structured differently.
What is the monthly payment on a $50,000 HELOC?
The monthly payment on a $50,000 HELOC depends on the interest rate, repayment terms, and whether you are in the draw period or the repayment period. During the draw period, many HELOCs only require interest payments. For example, at a 7% interest rate, your monthly interest payment would be about $291.67. Once the repayment period begins, you’ll start paying both principal and interest, which could raise your monthly payment to around $450–$500 depending on the term. Always check with your lender for specific terms and amortization schedules.
Is there a better option than a HELOC?
Whether there’s a better option than a HELOC depends on your financial goals and situation. A HELOC offers flexibility and lower interest rates, but its variable rate can lead to unpredictable payments. Alternatives include home equity loans (which offer fixed rates and lump-sum payments), cash-out refinancing (which can secure better terms on your primary mortgage), or personal loans (which don’t put your home at risk). For investors, DSCR loans or portfolio loans might be more appropriate. Each option has pros and cons, so consider what aligns best with your needs—flexibility, stability, or upfront cash.
What type of loan is a DSCR loan?
A DSCR loan is a type of non-QM (non-qualified mortgage) real estate loan used by investors. Instead of relying on the borrower’s income, it uses the property’s cash flow to determine eligibility. Lenders calculate the Debt Service Coverage Ratio to ensure that the property’s rental income is sufficient to cover the loan payments. These loans are ideal for self-employed investors, people with complex financial portfolios, or those who don’t meet traditional lending requirements. DSCR loans are typically used for buying or refinancing rental properties, not primary residences.
What is the maximum amount for a DSCR loan?
There is no universal maximum amount for a DSCR loan—it varies by lender. Some lenders offer DSCR loans starting from $100,000 and going up to $5 million or more, depending on the property’s value, rental income, and your down payment. The more income the property generates, the more you may be eligible to borrow. High-value investment properties, particularly multi-unit or commercial properties, often qualify for larger DSCR loans. However, the lender will always ensure that the rental income supports the loan payment based on the DSCR threshold, usually 1.0 or higher.
What is the disadvantage of DSCR?
The main disadvantage of a DSCR loan is its higher cost and stricter income requirements from the property. Interest rates tend to be higher than traditional mortgages due to the increased risk for lenders. Additionally, these loans often require larger down payments—usually 20–30%—and the property must consistently generate strong rental income. If the property is vacant or underperforming, refinancing or obtaining future loans can be difficult. DSCR loans may also come with limited lender options, especially if you’re investing in a niche market or rural area.
What is the minimum down payment for a DSCR loan?
The minimum down payment for a DSCR loan typically ranges from 20% to 30% of the property’s purchase price. This higher down payment helps offset the risk lenders take by not using your personal income to qualify you. The exact amount depends on factors such as your credit score, the property’s location, its rental history, and the lender’s criteria. Some lenders may allow slightly lower down payments for very strong DSCR ratios (like 1.5 or higher), but it’s always wise to be financially prepared for a substantial upfront investment.
Is DSCR a good loan?
Yes, a DSCR loan is a great option for the right borrower—especially real estate investors. It’s ideal for self-employed individuals or those who may not qualify for conventional mortgages. Because DSCR loans are based on the property’s ability to pay for itself, investors can grow their portfolio without needing to show personal income. However, because of the higher interest rates and down payments, it’s not the best option for every borrower. If you have a solid property and a long-term investment strategy, DSCR loans offer a flexible and scalable financing solution.
What is an example of a DSCR loan?
Let’s say you want to buy a four-unit apartment building for $500,000. Each unit rents for $1,000 a month, totaling $4,000 in rental income. Your expected monthly mortgage payment (including taxes and insurance) is $3,000. The DSCR would be $4,000 ÷ $3,000 = 1.33. This means the property generates 33% more income than the debt obligation. Based on this healthy DSCR ratio, a lender may approve your loan without asking for tax returns or W-2s, as long as you have the required down payment and meet the credit standards.
What is the interest rate for a DSCR loan?
Interest rates for DSCR loans typically range from 7% to 10%, depending on the lender, your credit profile, and the property’s risk level. Since DSCR loans are considered non-traditional or non-QM loans, they usually have higher interest rates than conventional mortgages. Factors like loan-to-value (LTV) ratio, DSCR ratio, and property type can all influence your final rate. Investors with higher DSCRs and strong credit histories may qualify for more competitive rates. Because of the interest cost, it’s crucial to ensure the property’s income is stable and sufficient.
Is DSCR a hard money loan?
No, a DSCR loan is not the same as a hard money loan, although they share some similarities. Hard money loans are typically short-term and funded by private lenders, often with very high interest rates and fees. They’re used for quick financing, such as house flips or distressed property purchases. DSCR loans, by contrast, are longer-term and used to finance stable rental properties. While both can be asset-based, DSCR loans are less expensive and more structured like traditional mortgages. They’re designed for cash-flowing properties and serious investors building a portfolio—not quick-turn projects.
Conclusion
DSCR loans and HELOCs are both powerful tools—but they serve different needs.
DSCR loans are perfect for real estate investors who care more about property cash flow than personal income. They’re a great way to grow your investment portfolio without the headache of tax returns or W-2s.
HELOCs are ideal for homeowners who want easy access to funds without selling or refinancing their homes. They’re flexible, affordable, and useful for ongoing expenses like renovations or education.
In the end, the best choice depends on your situation, your financial goals, and how much risk you’re willing to take. Take your time, compare your options, and make the move that’s right for you.